The presidential election has brought unprecedented attention to private equity. Political rhetoric of a campaign often leaves facts and dispassionate analysis by the wayside. Unfortunately, this comes at a critical time for the private equity industry. It is anticipated that the frenzy of the presidential election will abate and transition quickly to a potentially consequential lame duck session of Congress. Regardless of who wins the election, the stakes could not be higher for private equity and growth capital firms. There is pressure to address fundamental fiscal issues, and the political currents may be right for a Grand Bargain. Moving beyond a lame duck and into next year, dramatic tax changes, including the appropriate treatment of carried interest, the taxation of pass through entities and limitations on interest deductibility, could be on the table during tax reform. In addition, new regulations and rulemakings by the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and other agencies are pending.
Politics and Private Equity
Never has it been so important for private equity to explain what it does, how it works and whom it benefits. Since the start of the general election, President Obama’s campaign and allied groups have spent $38.4 million for almost 78,000 television spots, focused in a few swing states, about Bain Capital and private equity. And the attacks have not been limited to the Democratic side; during the Republican primaries earlier this year, private equity was attacked by Newt Gingrich and Rick Perry. While press coverage of private equity-related issues has slowed somewhat compared to last spring and the summer, these persistent negative attacks have allowed an anti-private equity narrative to seep into the perceptions of the electorate.
While the polls change day to day, the presidential race will clearly remain tight through Election Day. Most observers believe it will be decided in a small number of swing states, including Ohio, Florida, Virginia, Colorado and Wisconsin, and by a slim percentage of the popular vote. It is possible that party control of the House and Senate will not change. While the leadership may not change, we will be looking at more closely divided chambers after the election. This means that one of two things will happen: either Congress will become even more polarized and nothing will happen until external events force a hasty resolution to the fiscal situation; or leadership of both parties will capitalize on the growing concern about long-term fiscal problems and move towards a Grand Bargain. Either way, issues important to private equity will be up for debate and possible change.
It is in this political context that the private equity industry must be extra vigilant in explaining its positions. As part of tax reform, some policy makers have openly called for changes to carried interest, current partnership taxation rules and the deductibility of interest. At the same time, rulemakings to implement the Dodd-Frank financial reform legislation and the Foreign Account Tax Compliance Act, among others, are proceeding. These are important issues. The facts matter. But much of the media coverage of private equity demonstrates how highly charged assertions and incorrect characterizations can impact the environment in which important policy decisions are made.
Communicating the Facts About Private Equity
When policy makers are evaluating legislative changes or promulgating regulations, it is essential to the private equity industry and the investors in private equity that those policymakers are working of accurate information, not misperceptions about the asset class. The Private Equity Growth Capital Council (PEGCC) is diligently working to ensure that policy makers have the information they need and that the industry speaks with a unified voice.
Knowing that there is a real lack of understanding about private equity, what it does and who it benefits, the PEGCC launched a campaign in February called Private Equity at Work. Anchored by the campaign website, www.PrivateEquityAtWork.com, the PEGCC provides credible and easily accessible information about the industry and its proven record of strengthening companies, creating jobs and delivering impressive returns to pension funds, charitable foundations and university endowments. The Private Equity at Work campaign helps to set the record straight and foster a receptive environment for private equity on Capitol Hill.
Through the campaign, we have, for the first time, created a repository of information about the private equity industry freely available to the general public in the form of industry fact sheets and info graphics. The PEGCC has also created a series of video and written case studies chronicling specific private equity and growth capital investments. The private equity-backed companies profiled on our website are just a few examples of the thousands of companies that private equity has helped to strengthen—for the long term. We also feature animated whiteboard videos explaining what private equity is, how it works and who benefits from it. The website also features a blog with current content.
By using the campaign as a backdrop, the PEGCC has briefed over 80 national and political reporters on the private equity industry, and been quoted or mentioned in over 350 articles, many times the number of articles during all of 2011. While we cannot hope to compete with the advertising of a presidential campaign, our efforts have influenced the increased volume of coverage to incorporate more accurate reporting of private equity and growth capital. We also have established the PEGCC as the go-to resource for reporters looking for information about the industry.
Our campaign is but one way the PEGCC looks to shape public policy. The PEGCC has worked to develop the intellectual foundation of our policy positions, which include maintaining carried interest flow through of capital gains, opposing the establishment of an entity level tax on passthroughs, and supporting the maintenance of full interest deductibility. Through commissioned studies, including a study on interest deductibility and pass through taxation that was published in a peer reviewed journal, the PEGCC provides the basis for opposition to policies that will hurt the industry and the economy. The PEGCC has also facilitated more than 50 visits between private equity portfolio company CEOs and members of Congress. During a visit to a member of Congress, typically a CEO from a company in that member’s state or district tells his or her company’s story and how private equity enabled the company to grow its business and create jobs. Policy makers are able to see, firsthand, how private equity strengthens business in their districts, and how private equity benefits all 435 congressional districts in all 50 states.
Finally, we have been an active participant in the implementation of Dodd-Frank and shaping regulations that affect the industry. The PEGCC’s comment letters and meetings with relevant agencies have resulted in significant improvements to proposed regulations. Our success has been achieved through active participation from our member firms and the tireless work of our lead outside counsel, Debevoise & Plimpton LLP.
It is hard to imagine a time when the private equity and growth capital industry is going to be more in need of an organization solely focused on protecting the image of the industry and advocating its policy positions to key stakeholders in Washington, DC. Our active membership has been essential to our efforts and provided us with superb video case studies of successful private equity investments, portfolio companies with stories to share, data and, of course, funding for our efforts. I would love to hear your ideas about how the PEGCC can better represent the industry or how we could work with private equity firms and investors to present a unified voice for private equity and growth capital investment in this country.
Steve Judge
President and CEO
Private Equity Growth Capital Council