Private equity versus the little guy

NEW YORK (CNNMoney.com) -- Lawmakers will take a closer look at the exclusive world of private equity on Wednesday, with a focus on the effect that buyouts can have on companies and on workers.

The House Financial Services Committee, headed by Rep. Barney Frank, D-Mass., is set to hold the hearing. Witnesses from labor as well as the private equity industry are scheduled to testify.

Private equity firms buy companies with mostly borrowed money, take them out of the public spotlight and retool them with the aim of selling them for a profit later.

Most recently, Cerberus Capital Management, the private equity firm that counts former U.S. Treasury Secretary John Snow as chairman, agreed to buy a majority stake in Chrysler from DaimlerChrysler (Charts) for an investment of $7.4 billion.

The payout for the managers of buyout firms can be huge. In addition to a management fee that generally amounts to 2 percent of a fund's total commitments, they command a hefty 20 percent share of profits from a fund's investments.

Critics argue that buyout shops are getting richer on the backs of everyday American workers, while the industry contends it helps drive the U.S. economy.

Both sides will have an opportunity to present their case Wednesday. Among the witnesses slated to testify before the committee are Douglas Lowenstein from the Private Equity Council, an industry group, and Andy Stern, president of the Service Employees International Union.

The hearing is the second in a series devoted to the role hedge funds and private equity firms play in the nation's financial markets.