Private Equity Deals Gain Clout, May Hurt Workers

The sale of Chrysler to the private equity firm Cerberus highlights the increasingly powerful role private equity firms play in today's economy. And on Wednesday, a House committee looked at the explosive growth of private equity and the impact it has on workers.

Private equity is just a fancy name for an investment firm that buys a public company, changes management and then — ideally — sells it for a big profit in a few years.

But critics at the hearing noted that some private equity firms slash jobs and contribute to America's growing income gap. Among those critics: Andy Stern, who runs the Service Employees International, one of the country's biggest unions.

"For all the hundreds of millions of dollars of fees and billions of dollars in profits taken out of these deals at private equity firms, the workers at most of these companies have seen no increases in benefits, no increases in wages," Stern said.

Jon Luther, who runs the company that owns Dunkin Donuts and Baskin Robbins, painted a rosier picture.

He says when private equity took over his firm, the new owners didn't fire workers. Instead, they helped him get cheaper financing so he could expand and create more jobs.

Luther says that in the past two years, private equity money has helped create "2,000 new stores — all brands — worldwide."

"They've enabled that growth," Luther said, crediting private equity for making his company more entrepreneurial. Luther said private equity took the following attitude: "Let's go into new markets, let's seed that with new marketing and let's create incentives for franchisees to be those great pioneers as we mark our march across the country."

But the evidence for or against private equity endeavors is mostly anecdotal. Nobody at the hearing could cite a single study on private equity's net impact on jobs.

And the relationship between private equity and labor is complicated.

In fact, some of the money fueling private equity takeovers actually comes from union pension funds.

That led Rep. Maxine Waters, a California Democrat, to Stern, the union head, this:

"So, public employee pension funds and union funds could be investing in deals where people are going to get laid off?"

His answer: yes.

"They are called limited partnerships because they have a limited role in the decision-making process," Stern said.

And as Stern pointed out, pension fund managers have one key responsibility: getting the best investment return for the people they represent.

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