Congress warns private equity over excess profits

The private equity industry was put on the defensive by politicians on Capitol Hill yesterday as lawmakers began exploring ways to crimp excessive profits for managers at the top of the industry.

A congressional committee heard testimony from a powerful union which has begun a vocal campaign against private equity takeovers that lead to lay-offs and benefit cuts for workers.

The chairman of the committee, the Democrat Barney Frank, warned the industry to spread its profits or face new legislation.

"When a small number of individuals benefit from a particular deal in the tens and sometimes hundreds of millions of dollars and concurrently workers are laid off, we have a situation which seems to me wrong," he said. "To the extent that we see gross imbalances, then we're going to have to act."

The hearing was given adding piquancy because it came in the week that one of America's big three carmakers, Chrysler, fell into the hands of a private equity fund, thanks to its sale by DaimlerChrysler to Cerberus.

Douglas Lowenstein, president of the industry's new lobby group, the Private Equity Council, said that his members took varying approaches to running their businesses and it was wrong to perceive them as interested only in maximising short-term profits in order to quickly sell on, or "flip", their companies.

"There is no pattern of busting unions and firing workers in private equity," he said. "Firing workers and curtailing investment is hardly the best way to show buyers that you have built something of future value."

Andrew Stern, leader of the fast-growing service industries union, the SEIU, warned that highly leveraged buy-outs were putting companies and workers at risk, and the practice of "quick flips" meant that the long-term investment that might create jobs is increasingly absent.

"For all the hundreds of millions of dollars in fees and billions in profits taken out in these deals by the private equity firms, the workers at most of the portfolio companies receive no increases in pay or benefits - not even a more generous pension contribution," Mr Stern said.

The role of private equity in the US economy has moved up the political agenda as more companies are going private in bigger and bigger buy-out deals.

The SEIU has been arguing that workers should share in profits, and questioning the lack of transparency at private equity firms.