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37–208 PDF 2007

PRIVATE EQUITY’S EFFECTS

ON WORKERS AND FIRMS

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 16, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–31

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

May 16, 2007 ..................................................................................................... 1

Appendix: 

May 16, 2007 ..................................................................................................... 29

WITNESSES 

WEDNESDAY, MAY 16, 2007

Frank, Dr. Robert H., Johnson Graduate School of Management, Cornell 

University ............................................................................................................. 15

Lowenstein, Douglas, President, Private Equity Council ..................................... 12

Luther, Jon L., Chairman and Chief Executive Officer, Dunkin’ Brands Inc. ... 10

Stern, Andrew L., President, Service Employees International Union ............... 9

APPENDIX 

Prepared statements: 

Marchant, Hon. Kenny ..................................................................................... 30

Frank, Dr. Robert H. ........................................................................................ 31

Lowenstein, Douglas ........................................................................................ 41

Luther, Jon L. ................................................................................................... 51

Stern, Andrew L. .............................................................................................. 55

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

New York Times article, entitled ‘‘Unkind Cut For Janitors At Hilfiger.’’ .. 63

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PRIVATE EQUITY’S EFFECTS 

ON WORKERS AND FIRMS 

Wednesday, May 16, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Present: Representatives Frank, Waters, Maloney, Watt, Meeks, 

Moore of Kansas, Hinojosa, Clay, McCarthy, Baca, Lynch, Scott, 

Cleaver, Moore of Wisconsin, Davis of Tennessee, Klein, Wilson, 

Perlmutter, Boren; Bachus, Baker, Pryce, Castle, Royce, Gillmor, 

Manzullo, Shays, Feeney, Hensarling, Barrett, Pearce, Neugebauer, 

Roskam, and Marchant. 

The CHAIRMAN. This hearing of the Committee on Financial 

Services will come to order. 

The subject of today’s hearing is the question of private equity 

and specifically the effect that purchases of existing companies by 

private equity has on the workers and on the firms. There have 

been a number of concerns expressed about various new forms of 

activity in the economy, and this committee has had some hearings, and will have more, on the question of hedge funds. 

Today, we are talking very specifically about private equity and 

one special area of concern. I will say, in general that I have not 

seen any argument that it is a matter for which public policy ought 

to be concerned as to whether people choose to own a company 

through a public shareholder method or privately. That seems to 

me to be a decision that ought to be left entirely up to the people 

who are making the investments, but we do have concerns about 

the impact on workers. 

The committee, myself and many others, have been concerned for 

some time about increasing inequality in America. A year ago, we 

were debating the question about whether wages, real wages, were 

seriously lagging growth. We were debating inequality. That debate 

is largely over. There is general agreement that we have increasing 

inequality and that real wages have, in fact, lagged. There was a 

period earlier this year when they began to go up. That is now once 

again in jeopardy. I find the situation in which this country prospers overall, but the increased wealth is enjoyed by a relatively 

small number of people, to be troubling. It is morally wrong because it takes the efforts of most people to produce that wealth, 

and it should be shared fairly. No one is talking about equality. We 

are talking about degrees of inequality. I believe that the case for 

2

being concerned about this excessive inequality goes beyond moral 

considerations. 

There is a big debate in this country now about immigration. 

There is a debate about trade. We are engaged in the question 

about how welcoming we should be to foreign investment, direct 

foreign investment. As more and more Americans have become convinced that economic growth, globalization, and technological 

change do them very little good, and in some cases, harm, you have 

seen increasing resistance to the kind of public policies that many 

in the business community believe are in the interest of economic 

growth, and until we are able to diminish this trend of increasing 

inequality, I believe that resistance will grow. 

Now, with regard to private equity, I assume that the market is 

rational and that the private equity method increases value. I do 

not think people make deals in large numbers for no good reason. 

The question we have is does any of that increased value accrue 

to the people who work for the companies. Conversely, there is the 

fear that, to the extent that private equity is accompanied by significant increases in debt in some cases, this may have a negative 

effect on workers. 

Now, what goes into some of the other concerns we have had in 

terms of compensation—and we are talking here not about compensation paid by shareholders, which is a matter we dealt with 

elsewhere, but the compensation that some individuals get 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. Now the question then is, well, what are we going to 

do about it? 

It is not clear. There may or may not be public policy implications, but to the extent that there are public policies that have an 

effect on the private equity situation, some of which would come 

before this committee, some which would deal with taxation which 

would come before other committees, and to the extent that we see 

gross imbalances, then we are going to have to act. 

As an example of that, I would ask to put into the record the article from today’s New York Times with the headline, ‘‘Unkind Cut 

For Janitors At Hilfiger,’’ which says that one consequence of a 

$1.6 billion buyout of Tommy Hilfiger is that janitors making $19 

an hour were fired to be replaced by janitors making $8 an hour. 

The Hilfiger Company was bought for $1.6 billion. Janitors show 

up to work, and they make $19 an hour, union wages. They are 

fired, and they are going to be replaced by people getting $8 an 

hour. Mr. Hilfiger got $66 million as the result of the sale and will 

get $14.5 million a year through 2010. Workers in their 40’s and 

50’s have been laid off with 1 day’s notice. 

I do not know, as I said, whether public policy can do anything 

about that, but I do know that this is the sort of pattern that will 

make many of us determined to do something. So the point is a 

very simple one. If we have a situation, private equity, where enormous values are created, as apparently they are, and if only a few 

people get these large sums of money, and the workers are either 

no better off or worse off, then from a public policy standpoint that 

seems to me to be undesirable. Whether or not there are public polVerDate 0ct 09 2002 16:42 Aug 22, 2007 Jkt 037208 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\37208.TXT HFIN PsN: TERRIE
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icy remedies is the second question, but the first question I want 

to focus on today is whether there is such a pattern. 

I must say, and let me say in closing, that in many of the areas 

of private equity, we are talking about hotel workers; we are talking about service employees in buildings; we are talking about janitors. These are not people who are competing with low-wage workers elsewhere. These are people serving in very low-wage capacities 

in a market that cannot move. 

I think America can do better. Whether or not there should be 

a public policy response, we will find out, but we might find out 

with respect to policies involving unionization, taxation, and elsewhere. But the question remains, does the way in which private equity deals go forward exacerbate what is already an unfortunate 

trend in America for growth to go forward, for wealth to increase, 

but for inequality to increase even faster. 

The CHAIRMAN. The gentleman from Alabama. 

Mr. BACHUS. Thank you, Chairman Frank, for holding this hearing. 

This is the second hearing the committee has held on alternative 

investment vehicles, and, of course, this hearing is on private equity industry. Private equity is not a new phenomenon. It has been 

used, at least with some frequency, since the 1960’s. More recently, 

the industry has drawn attention, you could say scrutiny, because 

of several blockbuster transactions: earlier this week, 

DaimlerChrysler; and earlier than that, Clear Channel, Sallie Mae, 

and Equity Office Products, just to name a few. 

In 2006 alone, U.S. private equity transactions totaled $406 billion and accounted for 27 percent of all U.S. mergers and acquisition activity. One telling barometer of the growth of the industry 

is that, in 2001, private equity firms purchased 324 companies. By 

2006, that number had more than tripled to over 1,000 acquisitions. 

Several factors appear to be driving the explosive growth in private equity. Institutional investors, including public and union pension funds and university endowments and foundations, are turning more and more to private equity investments to generate higher returns for their stakeholders. In addition, publicly traded companies face an environment in which burdensome or overly burdensome regulations result in frivolous shareholder lawsuits and demands of activist shareholder groups, and all of those things have 

made going private an increasingly attractive alternative. And I 

think the executive compensation legislation that we considered 

just a few weeks ago may even accelerate this trend towards private financing if it empowers activist shareholders even more. 

Private equity can be a valuable tool for providing capital and expertise to underperforming companies or to companies struggling to 

generate quarterly growth and meet Wall Street expectations. The 

overwhelming majority of publicly traded companies are singlemindedly focused on one thing right now, and that is June the 

30th, or the end of the next quarter, which is most usually June 

the 30th, with the second quarter. Are they going to meet or beat 

estimates? Has the market already accounted for the company’s 

possible growth? 

4

Additionally, taking a struggling public company private gives its 

managers the opportunity to address strategic concerns free of dayto-day competitive pressures. To improve corporate performance, 

private equity firms typically recruit top managers often drawn 

from the ranks of senior management at publicly traded companies 

and directly tie their compensation to long-term performance and 

growth, not to short-term stock price gyrations. Indeed, our former 

Treasury Secretary, John Snow, verified this trend when he described his firm’s acquisition of Chrysler as providing ‘‘management 

with the opportunity to focus on their long-term plans rather than 

pressures of short-term earnings expectations.’’ 

We must, I think, support the continued growth of private equity 

and other alternative investments in our marketplace. An overly 

proscriptive, rules-based approach to regulation of private pools of 

capital could stifle the industry and drive private equity firms and 

their capital offshore or to investments in other countries, potentially compromising the competitive standing of our capital markets. 

Concerns have been expressed about the treatment of workers at 

companies that are taken private, as the chairman did earlier. 

While I intend to carefully listen to the testimony of today’s hearing on this point, it is at least not clear to me at this point that 

privately managed companies act any differently with respect to 

worker retention or compensation than publicly traded companies. 

To conclude, we have heard anecdotal accounts of differences in 

workers’ wages in private versus public companies—the chairman 

read one this morning—but we have yet to see any definitive empirical evidence in this area. 

Further, we should not automatically concede the premise that 

taking action to increase efficiencies in a privately held company 

is always unfair, unwarranted, or not in the best interest of the 

company. The actions of new management may, in fact, restore a 

company to competitive health, preserving most workers’ jobs that 

would otherwise be lost, maintaining pensions and providing other 

benefits. 

We must also not lose sight of the fact that, according to a recent 

study, private equity created 600,000 jobs in the United States 

from 2000 to 2003. Given the increasingly competitive nature of the 

global economy, our policy should be to ensure that American public and private companies can survive. 

So, in closing, Mr. Chairman, I will look forward to hearing the 

testimony of the witnesses and to learning more about the ways in 

which this committee can play a constructive role or if there are 

ways of enhancing the competitiveness and vitality of our U.S. capital market. 

The CHAIRMAN. The gentleman from Massachusetts, Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman, and thank you for holding this hearing. 

First, I would like to say I am pleased to notice that a constituent of mine is here today to testify, Mr. Jon Luther of Dunkin’ 

Brands, a Canton, Massachusetts-based company, who probably, I 

think, will offer a positive example of private equity involvement. 

I am also very pleased that we are exploring the impact of the 

growth of private equity firms on the U.S. economy and financial 

5

system. I think it is important that this committee has a solid and 

accurate understanding of the modern workings of private equity 

funds given the recent concerns about fund executive compensation, the treatment of capital gains tax benefits on their profits, 

and also their ability to exploit the debt market to make those profits, sometimes to the detriment of companies and their employees. 

I am going to be interested in a number of questions, but one of 

those is related to the modern-day private equity investment 

framework and how does it differ from the corporate raiders and 

leveraged buyouts of the 1980’s given that the same big names are 

still involved. 

Also, I think this committee, which recently held a hearing regarding hedge funds, would like to know what the difference in investment strategies is between the two. That is the private equity 

firms—a more long-term strategy or a more short-term, such as the 

hedge funds have exhibited. I think the common connector seems 

to be making a profit, and there seems to be a lot of industry overlap these days. 

The second issue that I will raise regards the pensions and benefits of the workers at the companies that are acquired by private 

equity firms. Yesterday’s Wall Street Journal said that Cerberus, 

which has announced its takeover of DaimlerChrysler, has pledged 

to work with the UAW, and I am a former employee of the General 

Motors Corporation at their plant in Framingham, Massachusetts, 

so I have a particular interest there; but they have assured the 

UAW that the $18 billion owed to autoworkers, my brothers and 

sisters, in benefits will still be honored, and they refer to this deal 

as a watershed moment for the private equity industry in global finance dealings. I would like to have confidence in that, and perhaps the panelists can sort of expand on that concept if they are 

able to. 

My third issue that I would raise is regarding the pension funds 

that invest in private equity firms. Mr. Lowenstein mentioned in 

his testimony that millions of retirees are benefiting from private 

equity investments through their pension funds, and that pension 

funds have at least $111 billion invested in private equity. I would 

like to hear a description of the allure in private equity investments and what are the benefits specifically to pension funds and 

being involved. 

Those are the issues that I would like to raise in a general sense, 

Mr. Chairman, and with that, I yield back. 

The CHAIRMAN. The gentlewoman from Ohio is recognized for 3 

minutes. 

Ms. PRYCE. Thank you, Mr. Chairman. 

Thank you to our panel for being here today. 

Already this year, 33 U.S. companies worth $160 billion have 

made equity buyout deals. The Chrysler deal serves as an example 

that private equity can go anywhere, even buying the most symbolic of American brands. Hitting close to my home, Limited 

Brands, based in Columbus, Ohio, announced yesterday that they 

would sell off their Express line to a private equity firm, Golden 

Gate Capital. 

6

The timing of this hearing could not be more appropriate. Thank 

you, Mr. Chairman, for holding it. The maintenance of our capital 

markets is paramount to our continued economic growth. 

I want to thank our witnesses for helping us demystify a market 

that has become an increasingly important source of funds for public firms seeking privatization, for companies in financial distress, 

for start-up enterprises, and for companies looking to spin off parts 

of their operations. There are often short-term losers with job 

losses tied to the public companies that had, for perhaps too long, 

delayed badly needed restructuring, but long term, a healthy, growing private company is better than a stagnant, underperforming 

public one, for the investors, the employees, and the economy. 

Mr. Chairman, I think we should be focusing some of our energy 

on what is making it advantageous for these companies to go private or, to put it another way, what is making it disadvantageous 

for companies to be public. Going private frees companies from the 

short-term pressures of the stock market, and as the U.S. Chamber 

and others have pointed out, quarterly earnings per-share statements are a centerpiece to this problem. Companies often sacrifice, 

creating long-term value if it means missing quarterly earnings’ 

projections. Even if they believe that the cuts are destroying business value over the long term, they are not investing in things in 

which they should be investing. We should be focusing on decreasing the regulatory burden on public companies, not increasing the 

burden on private equity. 

I want to thank the witnesses once again and the chairman for 

having this hearing, and I yield back. 

The CHAIRMAN. The gentleman from Louisiana is recognized for 

5 minutes. 

Mr. BAKER. Thank you, Mr. Chairman. I appreciate the interest 

in the matter in calling the hearing. 

Although there is really no clear definition of ‘‘private equity,’’ 

there are some characteristics of funds which I think are important 

to point out. Although sophisticated investors, those with a net 

worth in excess of $1 million, are certainly participants, it is financial institutions, insurance companies, mutual funds, and pension 

funds that provide the overwhelming bulk of the financial resources deployed by private equity. So, when we are contemplating 

regulatory constraint, we need to realize it is not just millionaires 

we are going after in this case, it is the CalPERS pensioners—by 

the way, CalPERS holds direct investment in private equity 

funds—and millions of others who, either through mutual fund investment or pension funds, have a share in the profits of private 

equity. 

I was surprised to learn that in households with average annual incomes of $35,000 or less, 18 percent are invested in mutual 

funds—who would imagine?—and that if those families want to improve their quality of life, it will come through the democratization 

of investment opportunity. 

As an example, Power Shares lists this morning in 

SmartMoney.com that they, by fall, may be a new ETF that will 

allow individuals to buy shares in an index that follows a benchmark of 30 traded private equity companies, companies that invest 

in private equities. This is similar in operation, I understand, to 

7

hedge funds, which offer the same opportunity to individual investors. 

So, in the search to help working people, we need to be very careful about how fat we make this regulatory book. It may fall right 

on top of them and deny them the opportunity to share in economic 

growth. Well, how big is this thing? Private equity investment in 

2006 was just over $400 billion. That compares with $1.1 trillion 

to hedge funds in a single period. Although big, the two together 

are the source of enormous liquidity in a highly competitive international marketplace. 

Hedge funds are going to act very quickly. They are going to see 

imbalances in the market, whether overpriced or underpriced. They 

are going to move, bring about market discipline, and get out. The 

churn rate for hedge funds is typically about 9 months. Where private equities are different is that they buy into the company and 

bring in management sometimes, and it can be there for 2 or 3 

years. For them to turn their profit, it means the underlying economic value must be improved, and the company itself must grow 

and prosper. This is not just about squeezing just a little inefficiency out; this is about providing jobs that otherwise might disappear. So, in engaging about concerns over workers’ fate, often it 

is better to have a healthy company grow over time than it is to 

let a staggering company fall under the weight of its failed economic model. 

So what happens if the U.S. rulebook is unreasonably fattened? 

There is a high probability that money will go elsewhere. The view 

that we are an economic island from which there is no escape is 

a very limited view of the world. London, Bombay, and Hong Kong 

are experiencing extraordinary growth. I have heard many members of this committee concerned about London’s passing New York 

as the primacy trading location for securities. The private equity 

firms in India enjoyed a 21 percent rate of return on equity last 

year. India passed China with $1 trillion, $239 million of private 

equity investments last year, and they, India and China, are modifying their rulebook to make their investment world all the more 

attractive to potential investors from the United States. 

So we need to be very careful about how we act here. The Dow 

Jones Index of India, called CNX, is up 42 percent year over year. 

This is not an illiquid, overregulated market from which people are 

saying to outside investors, ‘‘Do not come.’’ Instead, they are saying, ‘‘Come on down. Bring your money and your suitcases. We will 

make you a nice hotel room offer, and you can stay here for as long 

as you like.’’ 

How does that contrast with a market discussion where we are 

contemplating restricting the rules that enable smart people to deploy important resources to help grow our economy? 

You know, we need to go slow. Maybe we need to go really slow, 

or maybe we do not need to go at all. Maybe we need to just watch 

for a while and make sure we understand market function before 

we unintentionally take it backwards in an enormous step. 

Said another way, sometimes in Washington, people see a profit. 

So, first, they regulate it. If that does not stop it, then they tax it, 

and if that thing is still going, then they sue it. It is the three-step 

recovery plan to profit in America. 

8

I think we need to get past that. I think we need to realize that 

working families, employed by companies, will change jobs, and 

new opportunities will come, but investing in the corporate growth 

for the long haul, not the next 10 minutes, is what grows value. 

That is what builds wealth in American families, and that is what 

American workers need. 

The CHAIRMAN. The gentleman from California, for 4 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Mr. Chairman, I also want to thank you for holding this hearing 

to examine the effect that private equity has on the U.S. economy. 

Recently a great deal of attention has been focused on private equity due to the increased role that it is playing in the capital markets, and I understand the committee’s interest in exploring this 

topic. I am very concerned, though, that statutory exclusions from 

Congress are unwarranted. It could be very dangerous for the economy, and I think we have had some very cogent arguments from 

Congressman Baker. I am going to add a few additional points to 

this that I think we should be concerned about. 

If the goal of our hearing today is for Congress to have a better 

understanding of this recent boom that we are seeing in private equity, then we should be asking ourselves and we should review 

some of the failings of our public equity markets. 

For example, what is driving money out of the public into the 

private equity markets? One is the Sarbanes-Oxley legislation, 

frankly, coupled with abusive shareholders’ lawsuits, and that has 

created a terrible operating environment for many firms in this 

country. Companies have become more risk-averse, resulting in less 

investments and new business ventures. Of course, this means 

fewer opportunities for employees and an inefficient capital structure for investors. 

In my view, private equity is playing an important role in our 

financial system. As we have seen in recent years, private equity 

firms provide stagnant corporations with a viable alternative to 

public markets in a public market right now that is beset with 

enormous costs when associated with Sarbanes-Oxley. Private equity provides growth capital to these corporations, which frequently 

results in a properly capitalized corporation, which frequently 

means more investments in employees, and usually means the development of new business lines for that company. 

In conclusion, I believe the presence of private equity is an important component of our financial system, and any attempt to regulate the industry will be harmful to our capital markets and to 

our economy as a whole. 

Again, Mr. Chairman, I would like to thank you for exploring 

this issue today, and I look forward to hearing from our witnesses. 

The CHAIRMAN. I thank the gentleman. 

We will get to the witnesses, but I do want to ask one more question. 

People may hear something that sounds like the gavel. It will be 

my cast inadvertently knocking against the wall. If you do not see 

the gavel, ignore the noise. 

With that, we will begin with our witnesses. We will begin with 

Mr. Andrew Stern, president of the Service Employees International Union. 

9

STATEMENT OF ANDREW L. STERN, PRESIDENT, SERVICE 

EMPLOYEES INTERNATIONAL UNION 

Mr. STERN. Thank you, Mr. Chairman, and members of the committee. My name is Andy Stern, and I am president of the largest 

union, the Service Employees International Union, CTW, CLC. 

The story of America’s success is a story of work and working 

people. The greatness and promise of America has always been 

that if you work hard, you will have your work valued and rewarded. America’s gift has been that every generation has done 

better than the previous one, but we are now at a moment when 

the promise of the American dream is in jeopardy. 

A majority of Americans, sadly, say that they believe their children will actually be worse off than they are, and the facts are beginning to prove them right. People are working harder and harder 

for less wage increases. Opportunities are disappearing for access 

to jobs leading to the middle class. This is happening during an unprecedented period of prosperity in America. Some even have 

named it America’s new, ‘‘Gilded Age.’’ We have the highest rate 

of income inequality in this country since the Great Depression. 

Productivity is up, but wages are down. Profits are up, but Americans have less healthcare, less savings, and less stock ownership 

than they had the year before. 

Private equity, as Steven Pearlstein wrote today in the Washington Post about the Chrysler deal, has become, ‘‘the most powerful force in business and finance.’’ Today, private equity is buying 

and selling larger and larger companies and reshaping whole industries. It is engineering financial deals on a scale that, until a 

few years ago, seemed unimaginable. But the real story of private 

equity is the incredible wealth being created amongst its partners 

and the incomes being accumulated as a major contributor to the 

concentration of wealth amongst the top 1 percent of all Americans. 

Private equity activity is raising significant concerns about the 

impact on workers, on companies, and on the financial markets. 

First, there is the increasing practice of quick flips and sell-offs 

that undermine the industry’s claims that it seeks to promote longterm business growth. When private equity firms work with the 

managers and directors of companies that are targeted to buy and 

then offer those managers and directors ownership stakes in the 

new private company, it raises all kinds of questions of conflict of 

interest. And in discussing the conflicts between the banks and the 

private equity firms, the vice chairman of Morgan Stanley said, 

‘‘We are totally conflicted. Get used to it.’’ 

We have seen the problems of the economic exuberance of Enron 

and high-tech industries in the past. As some of the experts have 

said, even if one major deal fails, there is very serious concern 

raised about its impact on the credit markets, on investors such as 

pension funds, and not least of all on the workers of the affected 

companies. 

In terms of the workers, these risky deals at times put workers 

and companies at risk when high debt levels involved in buyout 

deals and high fees can create pressures to cut costs that are counterproductive to the stated goals of private equity firms to create 

long-term value and productivity. There are concerns about transVerDate 0ct 09 2002 16:42 Aug 22, 2007 Jkt 037208 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\37208.TXT HFIN PsN: TERRIE
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parency and disclosure and concerns that, obviously, not everyone 

is sharing in the success of these deals. 

For all of the hundreds of millions of dollars of fees and billions 

of dollars of profits taken out of these deals by private equity firms, 

the workers at most of these companies have seen no increases in 

benefits and no increases in wages. If we had just taken the $4.4 

billion in fees paid to the private equity firms in the 10 largest 

buyout deals, just the 10 largest buyout deals in the last 2 years, 

we could have paid for family healthcare for over 1 million American workers. You do not have to take my word for it. As the chairman said, look at what financial leaders and experts are saying 

about the private equity economy. 

But here is the opportunity. The opportunity is we are creating 

value. The question is, are we sharing in the value? For working 

people today in the private equity world, there have been far more 

misses than hits in the private equity buyouts. There have been far 

more fees raised than paychecks raised. It would be best if the industry made its changes itself and took steps to self-regulate to 

make sure that private equity did work for working people in the 

rest of the country. 

For workers in communities, the industry should also be expected to play by the same set of rules as everyone else. We should 

eliminate the conflicts of interest. If unions exist at a company 

being bought, like Chrysler, they should be at the table as soon as 

possible, and if no union exists, the private equity firms should 

make sure that workers have the right to form unions. But the private equity firms will not self-regulate, Mr. Chairman, or take 

their own steps to change, and we think it is necessary that Congress legislate. 

America has been at its best when a broad group of people have 

shared in the prosperity being created in the economy. We have 

gotten away from that in recent years. The greatest country on 

Earth can do much better to make sure that everyone shares in the 

success and in the prosperity that workers help create. There is 

more than enough wealth in the buyout business for private equity 

firms to continue to prosper, while also adapting their existing 

business model to expand opportunities for communities, workers 

and our country. The incredible wealth that exists in the private 

equity buyout industry presents an historic opportunity. It is an 

opportunity to repair the American dream. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

[The prepared statement of Mr. Stern can be found on page 55 

of the appendix.] 

The CHAIRMAN. Next is Jon Luther, the chairman and CEO of 

Dunkin’ Brands, Inc. 

STATEMENT OF JON L. LUTHER, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, DUNKIN’ BRANDS INC. 

Mr. LUTHER. Thank you, Chairman Frank, and members of the 

committee. 

As you mentioned, my name is Jon Luther, and I am the chairman and chief executive officer of Dunkin’ Brands. Dunkin’ Brands 

is the parent company of Dunkin’ Donuts, Baskin-Robbins, and the 

11

sandwich brand out West called Togo’s. I appreciate this opportunity to share with you the Dunkin’ Brands’ experience with private equity ownership. 

Our talented team of executives and employees, together with 

our thousands of franchisees and licensees, predominantly small 

businesspeople, has built a $6.4 billion enterprise operating in 47 

States and in 50 countries. Thanks to their effort and commitment, 

our brands are known and loved by consumers around the world. 

When I joined Dunkin’ Brands in January of 2003, we were 

owned by Allied Domecq, a publicly traded spirits and wine company headquartered in the United Kingdom. In November of 2005, 

Allied Domecq was acquired by Pernod Ricard, another spirits and 

wine company, based in France. Shortly thereafter, because 

Dunkin’ Brands was perceived as a noncore asset of Pernod Ricard, 

Pernod put our company on the auction block for sale. In March 

of 2006, we were acquired by a consortium of three United Statesbased private equity firms: The Carlyle Group; Bain Capital Partners; and the Thomas H. Lee Partners. 

During the period when we were an Allied Domecq subsidiary, 

we were considered, for lack of a better term, a ‘‘cash cow.’’ We 

were assigned yearly growth targets. We were usually last in line 

for attention, and certainly for capital to fuel our growth. Significant decisions required that I go to London. Our cash was swept 

every night, and our focus was usually on the next quarterly numbers. Our acquisition by Carlyle, Bain, and Thomas H. Lee has liberated our company. Our new owners expressed confidence in our 

management team, our leadership, our strategies, our vision, and 

our values. 

Our three goals are to take Dunkin’ Donuts national over time, 

transform Baskin-Robbins into a neighborhood ice cream shop once 

again, and to expand internationally, but rather than tell us to 

change our goals and our plans to achieve them, our new owners 

ask how they can support and how they can fuel our growth. 

Finally, we had the attention and the resources that we needed 

to realize our goals. The benefits of our new ownership to our company have been enormous. Their financial expertise has led to a 

groundbreaking securitization deal that has resulted in very favorable financing at favorable interest rates. This has enabled us to 

make significant investments in our infrastructure and in our 

growth initiatives. In addition, they have helped us create new 

franchisee financing programs that provide flexible, convenient, 

and competitive financing options to our franchisees, those small 

businessmen and women of every size in all of our markets. They 

have opened the door to opportunities that were previously beyond 

our reach. 

For example, they have introduced us to a real estate development firm that is assisting our Baskin-Robbins growth and are 

finding great real estate opportunities. They have done so well that 

we are now considering using them for our Dunkin’ Donuts growth 

and development as well. 

Our acquisition and the expansion plan for which we now have 

the resources have put us also in the national spotlight. Countless 

news stories about it have caused us to be sought out by many new 

12

potential franchisees, small businessowners, and also new employees who want to join our company. 

As a result of our franchising efforts, the engine for our growth 

has taken off. We are a 100 percent franchised enterprise. Every 

Dunkin’ Donuts, and every Baskin-Robbins, store represents the 

achievement of a dream for an entrepreneur somewhere in America. A new Dunkin’ Donuts means approximately 25 to 30 jobs per 

store, and a new Baskin-Robbins means approximately 12 to 15 

jobs. Over the next 15 years, because of this growth vehicle we now 

have, you can expect 250,000 jobs, jobs for young people, and jobs 

with good career paths in restaurant management, making it possible for others to achieve the American dream. 

Our new owners have never asked us to cut costs or to reduce 

our head count. Any reductions in staffing that we have had over 

the past 4 years have been as a result of our efforts to be more productive and more efficient. This year we expect to divest of Togo’s, 

our west coast brand, because it generated only $200 million in annual system sales, and this decision we had considered prior to our 

new ownership because we wanted—because of its size, we wanted 

it to have the same attention that we were getting from our new 

owners, and we could not do that while focusing on our two larger 

brands. 

You know, recently I was asked by a Boston Globe columnist 

whether Dunkin’ Brands would follow the path of many companies 

and move to a location where the cost of doing business would be 

lower. I was pleased to say, Mr. Chairman, that Massachusetts is 

our home. We are not going anywhere. I have 700 or 800 families 

who work for Dunkin’ Brands who rely on us for their employment. 

We believe in those strong community roots, and last year, together 

with our franchisees, we established the Dunkin’ Brands Community Foundation, and we have given $1 million to that foundation 

out of our pockets, with no resistance from our new owners. 

The mission of our foundation is to support those who serve our 

communities, especially in times of crisis, and this mission is true 

to our brand heritage and the values of the entire system, employees, franchisees, and our customers. 

In conclusion, as a result of our relationship with Carlyle, Bain, 

and Thomas H. Lee, our business has benefited. Our franchisees 

and employees have benefited, and wealth-creating opportunities 

have been spread among hundreds of entrepreneurs and careerists 

associated with Dunkin’ Brands. 

Thank you. 

[The prepared statement of Mr. Luther can be found on page 51 

of the appendix.] 

The CHAIRMAN. Next is Mr. Lowenstein, who is the president of 

the Private Equity Council. 

STATEMENT OF DOUGLAS LOWENSTEIN, PRESIDENT, PRIVATE 

EQUITY COUNCIL 

Mr. LOWENSTEIN. Thank you, Mr. Chairman, and members of the 

committee. 

The Private Equity Council represents 10 of the leading private 

equity firms in the world, and we are pleased to be invited to parVerDate 0ct 09 2002 16:42 Aug 22, 2007 Jkt 037208 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\37208.TXT HFIN PsN: TERRIE
13

ticipate in the beginning of this dialogue with this committee on 

private equity. 

Before addressing the issues that the committee has raised, I 

think it would be helpful to just take a brief second to demystify 

private equity, because private equity is about hundreds of thriving 

companies contributing to the economy in numerous positive ways. 

You just heard that if you get a cup of coffee at Dunkin’ Donuts, 

you are interacting with private equity. When you see a movie produced by MGM Studios, and then buy pizza for your kids afterwards at Domino’s, you are interacting with private equity. When 

you buy a new outfit at J. Crew, or you buy toys for your kids at 

Toys-R-Us, you are interacting with private equity. When you 

watch a movie or a sporting event at home, or when you use your 

cell phone, the chances are you are interacting with a semiconductor chip produced by a private equity-owned firm. 

Furthermore, private equity investments directly and indirectly 

benefit tens of millions of Americans. As we have heard this morning, public and private pension fund foundations and university endowments have chalked up returns from private equity investments that far exceed those available from the stock market. 

Between 1991 and 2006, private equity firms worldwide have dis- tributed $430 billion in profits to these and other investors. That 

is $430 ‘‘billion’’ with a ‘‘b.’’ These returns translate into stronger 

public employee pension programs, more funds for college financial 

aid and scholarships, and more funds for research and other causes 

supported by charitable foundations. Private equity, indeed, is 

about a lot more than enriching a handful of people. 

Let me turn briefly to address a few of the questions that the 

committee has asked about. First, do private equity firms invest in 

the businesses they own and operate? Well, we have some examples in our testimony which are, I think, quite typical of private equity practices. 

Sungard, for example, the software maker, has invested in its 

business. R&D projects since the private equity firm took ownership are up from 10 to over 50 today, and employment has grown 

by 3,000 people since the acquisition by private equity. Axel-Tech, 

with a 37 percent job growth and a 16 percent sales growth since 

the private equity firm acquired the company and the company 

moved into a new line of business, builds suspension systems and 

axles for vehicles, and it moved into servicing the United States 

military, which needs heavier suspension systems for the heavily 

armored vehicles serving our troops in Iraq, and Axel-Tech was a 

maker/supplier of those suspension systems. ITC Holdings, a 

Michigan utility, has seen private equity help grow the business, 

with job growth from 28 at the time of acquisition to 230, and capital spending up from $10 million to $200 million annually. 

These are not the exceptions in any of these examples. You must 

understand one central fact about private equity which often gets 

lost in all of the rhetoric and debate. They only succeed if they improve the performance and increase the value of the companies in 

which they invest. The entire business model rests on selling investments at a gain. Firing workers and stripping assets is hardly 

the best way to show future buyers that you built something of 

greater value. 

14

The second question raised by the committee concerns the impact 

of private equity on working men and women. Aside from case 

studies, which I think are helpful evidence of the impact, and there 

are hundreds more like it, it is true—data on private equity investments’ impact on employment in the United States is, in fact, anecdotal at this point, but research in Europe does suggest that private equity investments do, indeed, result in long-term job growth. 

A study by the international management consulting firm A.T. 

Kearney found earlier this year that private equity firms worldwide 

generate employment on average at a much faster pace than comparable traditionally financed firms. 

That said, the simple truth is that, as with any other acquisition 

involving a public or private company, private equity transactions 

can and do sometimes result in layoffs. In some cases, the most affected employees are the management level, and in other cases 

they are not. In some cases, the layoffs may eventually be offset by 

new hires over the long term when business grows stronger. Nor 

should we lose sight of the fact that even when there are layoffs, 

the willingness of the private equity owner to even acquire and invest in a troubled firm probably results in the savings of jobs that 

might otherwise have been lost. 

There is no one-size-fits-all pattern to private equity. There is no 

pattern of busting unions and laying off workers in private equity. 

It is simply not there. By the way, these limited partners are pension funds, public employee pension funds, and I ask you: Does 

common sense tell you that if they saw private equity firms gutting 

employees and gutting workers that they would really continue to 

support this asset class the way they have? 

The final area of interest to the committee is the impact of private equity on income inequality. Undeniably there are those in 

private equity who do very well. Equally undeniable is the fact that 

we have an income inequality problem in this country. Private equity is not the reason American companies and workers are under 

pressure or why wages and benefits are stagnant; these are based 

on pervasive global forces at work. Private equity alone cannot and 

will not and should not redress the income disparity problem in 

this country. That requires national will and national policies, and 

we are prepared to be part of any effort to attack that problem cooperatively and creatively either with government or with the 

SIRU and others in organized labor. 

At the same time, I believe that ensuring the firemen and teachers of the income they expect when they retire or that kids get 

scholarships to college they might not otherwise have gotten suggests that private equity does more than just distort income disparity at the high end. I noted earlier the $430 billion in profits 

to limited partners and how these flow to average Americans, but 

let me give you one very concrete example. 

The excess returns generated by private equity investments by 

the Washington State Investment Board for over 25 years has been 

$26,000 per retiree. Put another way, these returns have fully 

funded retirement plans for 10,000 WSIB retirees. 

In sum, private equity makes significant contributions to the 

American economy. It is innovative and flexible. It is not a silver 

15

bullet, but it is a part of the system, and it is a good part of the 

system. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Lowenstein can be found on page 

41 of the appendix.] 

The CHAIRMAN. Dr. Robert Frank. 

STATEMENT OF DR. ROBERT H. FRANK, JOHNSON GRADUATE 

SCHOOL OF MANAGEMENT, CORNELL UNIVERSITY 

Dr. FRANK. Thank you, Mr. Chairman. I am grateful for the opportunity to speak to you today about the consequences of the 

broader inequality problem. 

I am an economist at Cornell University. I have been writing 

about the causes and the consequences of rising income inequality 

for the past several decades in books, including ‘‘The Winner Take 

All Society,’’ ‘‘Luxury Fever’’ and, next month, ‘‘Falling Behind: 

How Rising Inequality Harms the Middle Class.’’ 

Much of the testimony you have already heard. I think private 

equity is part of a whole complex of forces that have made the U.S. 

economy much more competitive in the last several decades. One 

consequence of greater competition is that money tends to flow to 

the players that have the greatest impact on the bottom line. If you 

look at Jon Luther, he is a perfect case study of how high rewards 

at the top of the corporate ladder are not primarily, as many people 

seem to think, a result of corporate malfeasance, vivid cases to the 

contrary notwithstanding. Typically, somebody who is in charge of 

a big organization and who is making good things happen needs 

only to make 2- or 3 percent better decisions in a year’s time in 

order to have an impact on the bottom line of tens of millions of 

dollars. So, if the economy is getting more competitive, the expectation is that the rewards will flow to individuals who can make that 

happen. That is just the way the market is. 

The market produces a bigger pie. No economist ever claimed 

that the market guaranteed that a bigger piece of pie would automatically go to every person as a result of greater competition. 

Even though people in the middle have slightly higher incomes 

than they had before, one of the practical consequences—and here, 

I agree with Chairman Frank that we have to focus on the practical consequences of inequality rather than the moral ones if we 

want to see anything done about it—of higher incomes at the top 

is that people in the middle will have a much harder time meeting 

basic middle-class goals. 

Let me describe quickly a process that I call ‘‘expenditure cascades.’’ People at the top have vastly more money than before. People of middle income do not seem offended by that. That is one of 

the nice things about the United States. People are not jealous of 

the success of the rich. People at the top are spending more because they have more money. People just below the top are influenced by their spending. Maybe it is now the custom to have your 

daughter’s wedding reception in the home rather than in a rented 

club, so you need to build bigger. People just below those just below 

the top build bigger in response to that, and so on. Now the median 

house newly constructed in the United States is about a third bigger than it was in 1980. 

16

The rub for the middle-class family, which has no more real income now than in 1980, is if you do not buy the median-priced 

house for your area, your children will go to below-average schools. 

That is the way it works. So the median family is forced to save 

less, work more, commute longer distances, and work longer hours, 

in short, to be squeezed on every margin in order to meet the minimal goal of sending their children to a school of average quality. 

There is no pretending that this is not a genuine burden on the 

middle class. 

If we are to do something about this, it is a fool’s error to castigate corporate pay boards for not showing individual restraint. 

There is no such thing as individual restraint in a perfectly competitive system. You pay the market rate, or you do not get the talent that you need to be able to compete successfully. The only lever 

we have is tax policy in this arena if we are not happy about the 

way income distribution changes have been going. Most countries 

that have rising inequality have attempted to lean against it by increasing tax rates on top earners and increasing benefits for those 

who have been failing to keep up. 

For some reason in this country, we have moved in precisely the 

opposite direction by reducing tax rates at the margin for top earners and cutting the social safety net. This is a testament, I think, 

to the mysterious power of trickle-down theory, that if we cut the 

taxes on the top earners, we will somehow cause the economy to 

grow much more quickly. I do not have time to go into it in detail, 

but it has been widely discredited by economists of all political persuasions. Bruce Bartlett, in The New York Times last month, said 

that it is time for the supply-side economists to stop saying that 

tax cuts for the rich generate increases in tax revenues. 

So, again, I think there is no indictment of the people who are 

reorganizing businesses to make them more competitive and generate expansions in profits, and there is nothing morally improper 

about their being paid the going rate. There is, however, something 

morally questionable about a society that allows people’s fate to 

hinge solely on market outcomes. That has never been a prescription for a sound society. Societies that have tried that in the past 

have failed to prosper in the long run. Even the rich, the ostensible 

beneficiaries of tax policy in recent years if you reckon the consequences of those tax cuts, have actually been harmed by them. 

The tax cuts have enabled the rich to build bigger houses. What 

we know now is that, when everybody builds a bigger house, that 

just redefines the standard for what constitutes an acceptable 

dwelling. So you have more money after taxes, and you build larger. No gain. It is not really a tax cut. It is a loan financed by borrowing from China, Japan, Korea, and other nations that will have 

to be repaid in full with interest. In the meantime, we have been 

cutting the Energy Department’s project for rounding up loose nuclear materials in the former Soviet Union. We have been cutting 

back on a whole array of public services. This is not intelligent 

public policy. I think, in another 50 years, people will look back 

and say, ‘‘What on Earth could they have been thinking to do 

that?’’

[The prepared statement of Dr. Frank can be found on page 31 

of the appendix.] 

17

The CHAIRMAN. Thank you. 

Let me begin by asking Mr. Stern: There is a lot of top equity. 

We have talked about this, that there are acquisitions, office buildings, hotels, and places that employ a large number of workers. We 

are not competitive with manufacturing workers elsewhere. 

Dunkin’ Donuts would be the same. 

One of the things that concerns many of us has been the hostility 

to unions, and I am just wondering what your experience has been, 

and I would say people are ready to talk about it. I would say for 

many of us—and obviously, there is a difference between parties on 

this—but the unions do seem to be one way to deal with this without government intervention, collectively bargaining for chambermaids and janitors, and this is a new class of people. These are the 

people who sit in the lobbies of office buildings and make me show 

them my driver’s license so that I will not blow up the building. 

I do not know if that works very well, but it does not pay a whole 

lot, and that is probably the best job we have had since the WPA. 

What has been your experience in terms of trying to get collective bargaining agreements with these new owners? 

Mr. STERN. Well, first of all, I should say in response to the 

broader question, there have only been three ways we have distributed wealth in America historically: one has been the market, 

which as Alan Greenspan is saying is no longer working; two has 

been the government; and three has been unions. You know, 

unions are just a way to distribute wealth and end inequality. So, 

when you see a purchase like Cerberus, as Congressman Lynch 

said, you are glad the union is at the table, because you wonder 

what would happen if they were not. 

And so I do think there is an issue here of how, not through government regulation, but by private activity that goes on. I would 

say, you know, the private equity people have to make a decision 

of whether they are going to proceed in a way that too many employers have been proceeding as owners, which is to not let workers 

make a free and fair choice about whether they want to have an 

organization.You know, that is a conversation we would love to 

have with a new owner. 

The CHAIRMAN. What has your experience been? 

Mr. STERN. There have been no better than the private equity 

field, but there is now a growing—they are much more involved in 

the economy today, and so we are going to get to see again, you 

know, as they go from owner-distressed companies to very successful companies like Equity Office Properties or—you know, how they 

are going to behave as the new owners. Time will only tell, but so 

far there is no difference. 

The CHAIRMAN. Let me ask you. I do want to make one comment, 

and that is that one of the things we hear is that, to the extent 

that, for instance, we did our executive compensation bill, and to 

the extent that there were concerns about the compensation of the 

CEOs of public companies, that becomes an incentive for them to 

go into private equity. I must say that is the most serious attack 

on the morals of those people that I have ever heard. What it says 

is that they are so concerned with their own pay that they will 

make a fundamental decision about the form of ownership. It is the 

notion that someone is running a public company with his or her 

18

obligations to the shareholders who says, ‘‘I can make a lot more 

money if I sell out my shareholders and go to private equity,’’ and 

that would be a motive for making a change. I am shocked that 

people would think so ill of these people. 

Now let me ask Mr. Lowenstein. I agreed when you said that private equity did not cause this, but sometimes there are opportunities for the inequality, and I appreciate your acknowledging it. You 

say that private equity would be willing to participate in the dialogue. Let me ask, for instance, with regard to unionization, is 

there any general principle, is there any kind of general predisposition one way or the other? I must say, if we saw that there was 

some willingness to enter into those kinds of agreements, that 

would be relief for a lot of us. 

Mr. LOWENSTEIN. Well, I think it is difficult, obviously, for me to 

speak in the context of, you know, hundreds of deals and transactions that are being done involving dozens and dozens of private 

equity firms. 

My sense in the little time that I have been involved with this 

sector is that there is an openness to meeting and to talking with 

people from a variety of different stakeholder groups, including organized labor. There is no sort of antilabor, antiunion bias in private equity. There are plenty of private equity companies where 

union employees are a central part of the business, and those jobs 

have grown as part of the basic business plan. So, beyond that, I 

think it is difficult for me to generalize other than to, as we have 

in recent weeks, make clear that we are more than open to opening 

constructive and cooperative discussion with all stakeholders on 

these kinds of issues. 

The CHAIRMAN. Well, I appreciate that. My time is up. I do 

think, from the standpoint of many of us workers, particularly, 

frankly, low-wage workers in some of these occupations, they are 

a particularly important group for stakeholders, and it does seem 

to be—you say you are prepared to enter a dialogue. Some concern 

for the workers sharing in this value created would be very helpful. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Mr. Chairman, I saw and the members of the committee saw a 

‘‘Dear Colleague’’ that the chairman sent out yesterday. 

It says, ‘‘Dear Colleague, I appreciate the concern expressed by 

many about why my arm is in a sling. In order to avoid having to 

repeat the same conversation, I am sending out this ‘Dear Colleague.’ I ruptured a tendon in my left arm using a curling machine in the gym, and had it surgically repaired yesterday at Bethesda.’’ 

My staff went to that gym, found the curling machine, and found 

that it was manufactured by a private equity company. Now, we 

all know why we are here. His arm will be out of a sling in a week 

or 2, and we can maybe put the focus on something else. 

Mr. LOWENSTEIN. Perhaps it was a stronger curling machine 

than one made by a nonprivate equity firm. 

Mr. BACHUS. All right. Mr. Luther, I noticed as I was reading the 

history of Dunkin’ Donuts that it seems like, since it has been 

taken private, the number of franchises has expanded. Has being 

19

owned by private equity investors been something that is financing 

that, or has there been a change in corporate policy? 

Mr. LUTHER. Yes. Under the Allied Domecq regime, and shortly 

with the Pernod Ricard regime, they would sweep our cash every 

day to fuel their wines and spirits business. Our good cash generated—our good cash flow would go to them to build a Beefeater 

gin brand. For example, since private equity and since the ownership, they focus on our growth and enable us to go forward, meaning that they invest in infrastructure, which is something that we 

were not able to do before, meaning our IT systems and technology, 

so we can remain competitive with our competitive segment. Because of their brilliance in financing and the financial world, it has 

enabled us to put a program together, a franchisee financing program, which is more convenient for them to apply so they can build 

these stores to add the jobs and to get in these communities and 

do good work, and if it were not for their great expertise in that 

area enabling us to do that, our franchise system would be slower 

in growth, and that is important. Since we are 100 percent franchised, obviously that is the engine for our growth, and one of the 

most important attributes to our business growth. 

Mr. BACHUS. So your private owner sponsors actually help finance these franchisees? 

Mr. LUTHER. No. They have aided and abetted us to work with 

outside financial firms to get better favorable rates by their better 

understanding of financial aspects, and perhaps we get too close to 

it sometimes, but for this outside influence to come in and educate 

and coach us in those areas, it has benefited us greatly. 

Mr. BACHUS. I will ask this to anyone on the panel. Back in the 

1980’s, we had corporate raiders, and we had the LBOs. As to private equity investments, how are they different from that, or is 

there a difference? 

Mr. LOWENSTEIN. I will take the first crack at that. 

I think there are a number of differences today than 20 or 30 

years ago. For one, in the early days of private equity, the lending 

typically would come from a single lender, the debt levels in a 

transaction would typically be at the 90 percent level, maybe even 

higher, and the transactions were much more tied to asset sales as 

a way to quickly repay the debt to make the leverage play work. 

Today, you have a lot of differences. 

First of all, the typical debt level in recent years in private equity transactions has been hovering around 40 percent—I am 

sorry—equity levels are around 40 percent, so up considerably. 

There is a lot less leverage in the transactions. Secondly, the level 

of due diligence of private equity firms today compared to 20 years 

ago is quantumly farther along than it was then, and even the simple technology available to do effective analyses of the investments 

and so forth is far better. Sometimes it takes private equity firms 

2 years before they actually make an acquisition, so they raise 

funds, but they are not investing all of their funds immediately. 

I think you also have—the other critical point is that we are at 

the point where the way today that you make money in private equity is not by an asset sale, because, in a sense, everybody knows 

what the assets are, and they are priced into the deal. These are 

all auctions. They are competitive processes. If you are going to 

20

grow a firm, you have to grow it with operating improvements. 

That is a big change from the way it was 20 years ago, and so the 

value creation comes from investment, from growing, from improving operations in the management of the company. So I think those 

are some of the major changes. 

Mr. STERN. I am not as familiar with all of the details, but I do 

want to read to you what the founder of The Carlyle Group says, 

which I know we talked a lot about value and decisionmaking, but 

he says, ‘‘The fabulous profits that we have been able to generate 

for our limited partners are not solely a function of our investment 

genius, but have resulted, in large part, from a great market and 

the availabilities of an enormous amount of cheap debt. Frankly, 

there is so much liquidity in the world financial systems that lenders, even our lenders, are making very risky credit decisions,’’ and 

I think that is a very big difference from the 1980’s. 

Mr. BACHUS. If they are paying top dollar, of course the shareholders are all benefiting from these sales, I would think, and then 

the private equity investors—I mean, if they pay top dollar, and 

they still make it work, that seems like a win-win situation. 

Mr. LUTHER. Just to weigh in, my experience is that there has 

been a lot of equity put into our deal, so it is not leveraged quite 

as it was in the 1980’s. I think a significant difference for me in 

being in this industry for a while, meaning my industry, the restaurant industry, and watching what happened in the 1980’s as 

compared to today is the fact of Carlyle, Bain, and Lee. During our 

auction process, we were engaged with maybe 25 of these firms 

that were in the auction process. They looked at the leadership. 

They looked at the management. They looked at organic growth as 

opposed to ways to cut their way or to save their way to success. 

They looked at all of those organic pieces—management values. 

What kind of leadership values do we have? What do you give back 

to the communities? What kind of relationships do we have with 

communities and franchisees? That was a greater part of their due 

diligence than maybe 20 years ago—I am not sure—but in talking 

with all of the potential bidders for our company, they all had those 

questions and that curiosity rather than the 5-year plan or the 

numbers. 

By the way, just for the record, in our case we were able to put 

our numbers together—the management team’s and the management projections—in the bidding process. No one told us to put the 

numbers higher or lower or whatever. They left it up to us, and 

then the auction was based on that. So there was not this, ‘‘Make 

it better than it is. Let us take this thing forward in a way so we 

win or lose.’’ It was how do we do this the right way, and I think 

that is an important distinction, maybe, of the perceptions of the 

past. 

Mr. BACHUS. Thank you, Mr. Chairman. 

The CHAIRMAN. I would note that you got extra time for reading 

my ‘‘Dear Colleague.’’ 

The gentlewoman from California. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I want to thank our panelists for being here today to help us understand what has become a very, very important area as we look 

at our responsibilities here in this committee. 

21

I would like to know from Mr. Lowenstein, I believe it is, if you 

can help me to understand what requirements are placed on the 

fund, the private equity funds, by the investors. For example, 

CalPERS in California has a $240 billion portfolio there, and if 

they invest in one of these funds, what do they ask of the fund? 

What do they say they want you to do if they are investing in funds 

so that the fund can be involved in these buyouts where we are 

concerned about the employers in the community? What kind of requirements do they place on the people they give the money to? 

Mr. LOWENSTEIN. Congresswoman, I think that, in all candor, 

the question is probably better put to CalPERS and the investors, 

themselves. I am not part of those negotiations. I will say that 

there are very, very intensive negotiations that occur between the 

limited partners and the private equity firms in putting the partnerships together. These are very, very intensely negotiated funds 

over an extended period of time, and certainly, in that context, limited partners are able— 

Ms. WATERS. But you do not know of any standard code of conduct that is being required? 

Let me ask Mr. Stern. 

Mr. Stern, does the union place any requirements on its money 

that it invests in these kinds of deals? 

Mr. STERN. Well, I mean, most of the unions who are in the private sector are governed by fiduciary responsibilities that would 

not allow us to place particular kinds of requirements, you know, 

in terms of investment decisions other than the nature of the return that we would get on the investments. I think CalPERS’ instructions, for better or worse, to the private equity firms are to 

make a lot of money. 

Ms. WATERS. So public-employee pension funds and union funds 

could be investing in deals where people are going to get laid off? 

Mr. STERN. Yes, because, as I understand most of these limited 

partnerships, you know, they are called ‘‘limited partnerships’’ because they have a limited role in the decision-making process, and 

so part of the problem with some of the laws in our country today 

is that they do not allow investors to make what one might think 

are appropriate decisions about issues like that because it would be 

a breach of our fiduciary responsibility. 

Mr. LOWENSTEIN. If I may just add to that, though, nobody is 

forcing any limited partner to invest in a private equity fund, so 

the best way to vote against companies that are not using your 

money in socially responsible ways that you care about is to not 

give them your money. As we said, CalPERS and many other limited partnerships’ stakeholder pension funds are providing billions 

and billions of dollars to fuel this, in a sense, and then vote with 

their pocketbooks if they see a problem of how these transactions 

are being conducted. 

Ms. WATERS. Well, let me just say this: For years, I was involved 

in a struggle in California to divest our pension funds from companies doing business in South Africa. We heard all of the fiduciary 

arguments, but we changed it, and we got involved in a divestment 

movement that helped to change the attitudes and create some social responsibilities, so it is something that we need to examine. 

I yield back the balance of my time. 

22

The CHAIRMAN. Mr. Hensarling. 

Mr. HENSARLING. Thanks, Mr. Chairman. 

First, Mr. Stern, you spoke about income inequality, I believe, in 

your testimony. Does the janitor who cleans your office make the 

same income as you do? 

Mr. STERN. No, sir. 

Mr. HENSARLING. So can one say that you, yourself, are practicing income inequality? 

Mr. STERN. No, sir. 

Mr. HENSARLING. Why not? 

Mr. STERN. Because I think what we are talking about here in 

terms of income inequality is the growing gap between the rich and 

the rest of the population—that 150,000 or 300,000 Americans now 

make as much as the other 150 million Americans. I think we are 

talking about a very drastic set of extreme circumstances that were 

raised in the colony of the Great Depression. 

Mr. HENSARLING. So are you more offended by the income inequality of those who make less than you? It appears that maybe 

you have more concern for those who make more than you. 

Mr. STERN. I am not concerned with people getting wealthy, but 

I am concerned that people who work every day cannot own a 

home, raise a family, and live the American dream. And I am very 

concerned about a country where my kids and grandkids will be 

the first generation in American history to do worse than their parents. I do not think that is America. 

Mr. HENSARLING. Well, I happen to agree with you there, and 

that is, for one, why I am concerned that recently the House passed 

a budget that included the largest tax increase in American history 

that will impose an approximately $2,700 tax increase on all of the 

families back in the Fifth Congressional District of Texas. 

Dr. Frank, in your testimony, you talked about, I believe—I do 

not want to put words in your mouth—that we have been cutting 

the social safety net. Does that capture what you said in your testimony? 

Dr. FRANK. Yes, sir. 

Mr. HENSARLING. I have been reviewing figures for the Congressional Budget Office and the Office of Management and Budget, 

and by the figures I have seen since 2001, healthcare assistance 

has increased 40 percent at the Federal level; housing assistance, 

27 percent; food assistance, 58 percent; cash and other assistance, 

40 percent; and general anti-poverty spending at the Federal level 

has been 41 percent. The only major poverty program that I can 

find that has decreased is TANF. That is because the caseload is 

down about two-thirds due to work requirements. What have you 

discovered that CBO and OMB and everybody else who calculates 

these numbers haven’t discovered? 

Dr. FRANK. Well, part of what you have to understand, Congressman, is that the cost of a lot of the entitlement programs goes up 

for everyone, so we can provide that year by year. There have been 

cuts in the earned income tax credit programs. There have been 

cuts in the rate at which public transport has been supported. The 

public schools— 

23

Mr. HENSARLING. I’m sorry, if I could interrupt. Where did you 

get your figures on the earned income tax credit? Because my figures show that it has increased at least 38 percent since 2001. 

Dr. FRANK. Relative to the cost of the middle- and low-income 

family meeting basic needs, those payments have not kept pace, 

Congressman. 

Mr. HENSARLING. Let me ask you another question. I think you 

spoke of the need of tax policy changes to address income inequality. Is that a fair assessment of your testimony? 

Dr. FRANK. Yes. 

Mr. HENSARLING. From my figures, we have roughly 50 percent 

of the population that for all intents and purposes pay no income 

tax at the moment. Do your figures differ from that? 

Dr. FRANK. No, they don’t differ from that. Most of those people 

do, however, pay payroll tax. 

Mr. HENSARLING. That they do, and if we don’t reform our entitlement programs, they will pay more as well. My figures show 

that over the last 25 years, the top 20 percent of income earners 

have seen their percentage of Federal tax paid increase and 80 percent of the taxpayers have seen them go down. 

Do you have some other set of figures besides the ones that I 

viewed from the U.S. Department of the Treasury. 

Dr. FRANK. No, sir, that is an expected consequence of the 

change in where the pretax income has gone. The more pretax income that goes to the top, of course the more tax will be paid by 

people at top. 

Mr. HENSARLING. I see where the top, I believe, 5 percent of income earners pay almost 60 percent of Federal income taxes. What 

percentage would you have the top 5 percent pay? 

Dr. FRANK. A higher percentage than that because we are currently borrowing $800 billion a year because we are not collecting 

as much in revenue as we are incurring in expenses. The tax increase— 

Mr. HENSARLING. Maybe we need to do something on the spending side as well. I see my time is up. 

The CHAIRMAN. Ms. Maloney. 

Mrs. MALONEY. I would like to thank you, Mr. Chairman, for 

having this hearing, and to thank the panelists for attending. 

Many of you have touched on the widening gap between the haves 

and the have-nots in our country, which is a tremendous concern, 

I would say, of all Members of Congress. It is very troubling and 

has major ramifications. Last year, Steven Schwartzman, the chief 

executive of the private equity group Blackstone warned in an 

interview with The Financial Times that the widening gap between 

the lavish pay of executives and CEOs and middle America’s stagnating wages may result in a backlash and in a political and social 

crisis in our country, and the best way to deal with this widening 

income inequality, according to Mr. Schwartzman, is for the middle 

class to do better. 

So I would like to ask Mr. Lowenstein and Mr. Stern if you 

would comment and anyone else on my question. Mr. Lowenstein, 

can you tell us how the private equity deals where Mr. 

Schwartzman and his colleagues are reaping, literally, billions of 

24

dollars in fees and payouts, how are their private equity deals helping the middle class do better? 

Are the workers sharing in the increased profits of these private 

equity firms through increased wages or benefit packages? How are 

these deals helping middle America? 

Mr. LOWENSTEIN. Well, I think as a general proposition, as I said 

in my testimony, we believe that private equity is strengthening 

companies, and making them more competitive. And by definition, 

if that is true, people who work for those companies have more secure jobs. And in many cases, as I also said in my testimony, the 

few examples we use there has been job growth in those companies. 

And so, I think in that way that obviously supports middle income wage earners and so forth. As I also said, there is a range 

of indirect benefits. When you talk about private equity profits, 80 

percent of the profit when an asset is sold goes to the limited partners. And those limited partners, as we discussed, have money that 

then flows back to retirees and many others in our community who 

benefit from that indirectly. 

I would also suggest to you that there is another indirect benefit 

to the extent that private equity firms are allowing and strengthening businesses that are part of people’s everyday lives—Dunkin’ 

Donuts and Domino’s Pizza and J. Crew and other places that people shop on a regular basis. That is also helping people acquire the 

necessities of everyday life. 

So I think there are various ways that these transactions promote value and growth and flow through to lots of individuals. 

Mr. STERN. The Census Bureau reports that America has had its 

fifth straight year in a row that Americans did not get a raise, the 

longest period of economic stagnation in the history of our country. 

And it is all about that we are creating wealth, but it is not being 

distributed. I don’t think private equity per se—maybe indirectly, 

but not directly, has done anything to help rebuild the middle 

class. There used to be a joke about when people were creating new 

jobs, they would say there are 10 million new jobs and I got 3. I 

think that is a lot of what we are seeing here. 

We are not necessarily creating the middle-class jobs that we saw 

in the plants in Massachusetts, where there were union jobs, and 

jobs where people could own a home and raise a family. And I am 

not saying that private equity is the cause of it. I am just saying 

that I don’t think they are the solution to it either, so far. 

Mrs. MALONEY. Would you like to comment, Dr. Frank, or anyone else, on this? 

Dr. FRANK. Again, I don’t think that attacking the competitive 

forces is the lever that you want to pull. I think the lever that you 

want to pull—you do have to cut spending where possible, but the 

government we elected last time campaigned as an opponent of 

government waste. You cut what you can. Yet one of the programs 

they cut was the Energy Department’s program to round up loosely 

guarded nuclear materials in the former Soviet Union. 

We just don’t have the revenue to do the things that we need to 

do, and I think that is where your focus should be. 

Mrs. MALONEY. Mr. Luther? 

Mr. LUTHER. Yes, my experience might be a microcosm of the 

overall economy, but in our case when private equity acquired, the 

25

opportunity for many of our employees who worked for Dunkin’ 

Brands, not our franchise organizations, we distributed some of 

that wealth to them in the form of stock and options to over 150 

people in our organization; that is 15 percent of our company that 

now has some opportunity perhaps for their children to go to college without borrowing money or whatever. 

Our goal is to continue to distribute those stock options and equity opportunities into our organization deeper and deeper, so we 

distribute the wealth in that regard. 

Our franchise communities create the jobs and create management jobs within our restaurants and multi-unit jobs that hopefully 

can enable those employees to continue to grow their experiences 

and their careers so that they can compete in the middle-class environment, so we try hard to make sure we do that. 

The CHAIRMAN. We will take Mr. Castle and then we will break 

for the votes and come back immediately. There is apparently only 

one 15-minute vote. Mr. Castle. And then we will break and come 

right back. 

Mr. CASTLE. Thank you, Mr. Chairman. This is an interesting 

plight and tug of war going on here. Mr. Stern, let me ask you a 

question. I read your paper and listened to what you had to say 

and you are concerned, as you should be, with working people and 

the status and how they have gone. My question or concern here 

is, frankly, I am not sure how private equity has impacted that directly. You do have some comments in there and some anecdotal 

evidence of some things. 

But my question to you is—or to anyone else who really knows 

the answer—is there any empirical or statistical evidence with respect to private equity in terms of their investments and what has 

happened to the employees either in losing jobs or losing benefits, 

be it healthcare or pensions or whatever? And has any of that been 

laid up against what might have happened otherwise? That is, 

what is happening with corporations today in America? I am trying 

to get the gist of whether private equity has had a negative impact 

on that or not. 

Mr. STERN. I don’t think there is it enough data or studies really 

yet to make those decisions. And we all can cite anecdotal situations and claim that they sort of represent the macro level, but I 

think we are all watching what happens. I think there is a huge 

opportunity here as private equity does receive, as the Congresswoman said, money from lots of public sources, you know, and that 

has helped make them incredibly successful, to think differently 

about what is their social responsibility as we would expect any 

business in America. 

And we are hoping that, given the source of their capital particularly, you know, from public pension funds and other places, that 

there could be a dialogue about doing as we saw with the deal in 

Texas, where environmentalists and people tried to work something out that was reasonable and rational for everybody. 

Mr. CASTLE. Does anybody else know if there is any real study 

or statistical evidence, and not just your conjecture on it. 

Mr. LOWENSTEIN. There is data in Europe. It is not perfect data, 

but there have been studies done in Europe that show that private 

equity tends to result in net job growth and more investment in 

26

R&D, and other sort of measures of economic growth. There has 

been very little research here, so I think that is a gap that we are 

looking to fill. 

Mr. STERN. If you don’t mind, there is one study that I think is 

important that shows that the private equity companies pay a 

lower premium to the public shareholders than other strategic reinvestors pay for the same companies. This is where Chairman 

Frank was asking questions about conflicts. It is not yet known 

whether that is true, but we are seeing the private equity pay a 

lower premium to shareholders in public companies than other 

strategic investors. 

Mr. CASTLE. This is an unanswerable question, I guess. Mr. 

Lowenstein to you, with the news of the Cerberus capital management takeover of DaimlerChrysler, or of Chrysler at least, I have 

a concern. I am from Delaware and we have a Chrysler plant there 

that has already been notified that they are going to lose a number 

of those jobs—not this year, but in the next couple of years. 

With respect to private equity type takeover, my question is what 

will happen to those employees—I am not suggesting we can wave 

a magic wand and get them reinstated—but with respect to their 

pension and healthcare plans, what has been the approach of private equity with respect to the rights of employees in circumstances such as the private equity takeover of a public corporation? 

Mr. LOWENSTEIN. As I said, with respect to the Chrysler particulars, I am really not in a position to discuss that. As a general 

proposition, as I said in my opening statement, I am certainly not 

aware of any pattern or consistent effort on the part of private equity firms to raid pension funds or do a variety of things that are 

anti-worker, anti-pension, or anti-benefit. As I said, the long-term 

business strategy is growth and you need to have a motivated and 

viable workforce to do that. 

Mr. CASTLE. I don’t think Cerberus is under your direct jurisdiction, but again, on the automobile or perhaps any large investments—they have already made investments in the auto industry 

to a degree and my concern is that is a very capital-intensive business. And do they have the ability to be able to make the investments in equipment technology, research, and some of the other 

things that are going to be needed to restore the American automobile industry to where it was before or is this a temporary investment on the way to making a profit someplace shortly down 

the road? 

Mr. LOWENSTEIN. Let me answer that two ways: One is—I can’t 

say what they will or won’t do in the long run—I do believe that 

as all private equity funds the intent here is to grow and add value 

to the company. Chrysler is a difficult case study because obviously 

it has been operated as a public company, and it is hard to argue 

that it has been operated successfully as a public company in recent years. They announced 16,000 layoffs recently, as you know. 

I think as to exactly how that transaction plays out, we will just 

have to wait and see. 

But again, as an overall business proposition, there is nothing I 

have been exposed to in my conversations with private equity firms 

that suggests that they have sort of an anti-worker or anti-growth 

27

bias in the business model, and in fact, quite the opposite in my 

experience. 

Mr. CASTLE. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. Now, Mr. Watt informed 

me that I was too optimistic. Apparently this is a motion to adjourn 

and then there is going to be 10 more minutes of debate and a couple of votes. We will be gone for 45 minutes. Can the witnesses 

stay? If they can, we will reconvene at 12:15 p.m.. We will have 

time to do whatever, and we will be back in 45 minutes. So we are 

in recess for 45 minutes. 

[Recess] 

The CHAIRMAN. Another vote has been called. I am going to end 

the hearing. I apologize. You sat around for nothing. I wish—you 

got caught in the crossfire of a parliamentary dispute. It is another 

adjournment vote. 

I appreciate you having put up with this. I am apologetic. I was 

misinformed and I would not have held you here. I thank you for 

coming and we will not hold you here any further. 

If any of the witnesses wish to submit anything for the record, 

please feel free to do so. 

[Whereupon, at 12:45 p.m., the hearing was adjourned.] 

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May 16, 2007

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