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PE Panorama: Lobbying misfire

By Paul Mackintosh  
Nov 25, 2019

The Big Four professional services firms have landed in media and political hot water many times, so it’s no surprise that it’s happened again. But this time, the hot water has also splashed onto the private equity industry, whose ill-advised attempt to secure “objective” validation has highlighted the flaws of both disciplines, and handed a free publicity gift to its critics.

It must have seemed like a good idea at the time. Faced with increasing criticism from Elizabeth Warren and other US Democratic presidential candidates, private equity industry lobby group American Investment Council (AIC) commissioned Ernst & Young (EY) to produce a report, Economic contribution of the US private equity sector in 2018, to show the good things that private equity had done for the US. Unfortunately, those Democrats and others are now piling in on the report, on the unsurprising basis that it’s not objective.

According to a ten-page open letter to EY Chairman and Chief Executive Officer Carmine Di Sibio signed by Ms. Warren and six other members of Congress, “this new report appears to have been prepared as part of the response to our new private equity legislation, the Stop Wall Street Looting Act of 2019”. It takes EY to task for “providing rigged reports”.

The letter doesn’t just stop at name-calling; it produces contrasting research and detailed critiques of EY’s methodology to undermine the report’s conclusions. And it doesn’t just stick to the question of private equity’s contribution to the US economy. One of the most telling questions that it asks the AIC – which the report doesn’t answer – is “the value of the carry earned by each general partner in each of its firms”.

To be fair to EY, the report does say right on its front page that it’s prepared for the AIC, so it’s not as if they’re hiding the fact. But it comes out the same year that the Public Company Accounting Oversight Board in the US issued its own report observing that the Big Four bungled almost 31% of their audits since 2009, and the year after EY’s Big Four peer KPMG was tarnished by collusion in corruption in South Africa.

The AIC’s choice of a Big Four firm to act as its defender shows the same kind of tone-deaf, cloth-eared, self-regarding sense of entitlement that private equity so often shows when dealing with the outside world, including, all too often, its investors and the public affected by its actions.

If this is their attitude, can you ever believe anything that a private equity firm tells you, including its internal rate of return and performance? If their lobbying efforts are rigged by supposedly gold-standard third-party advisers, then what do you think their pitches for your investment money are going to be?