Posts Tagged private equity

Under Increased Scrutiny, Private Equity Firms Running Scared

Private equity has an image problem. What began a few months ago with questions about Mitt Romney’s background as chief of Bain Capital has ballooned into a tidal wave of legislative, regulatory and media attention — and much of it unflattering. Now the industry is working to fight back, as some fear that the bad press could lead to greater regulation.

“This is probably the most challenging period our industry has faced,” said one private equity industry executive, who spoke to The Huffington Post on condition that he not be named.

Before Mitt Romney entered the political fray, private equity firms — which specialize in pumping investors’ money into companies that aren’t listed on the U.S. stock exchange — enjoyed relative anonymity. Few people outside the business community had a detailed understanding of how they worked, and many of the firms in turn did their best to stay clear of the spotlight.

“We haven’t done a particularly good job of amplifying [what we do] because we haven’t been under attack before,” an executive at a global private equity firm said, also on condition that he not be named. “Do we have reason to be concerned? Hell yes.” He added: “The identity of the industry’s going to be shaped in 2012.”

Romney’s candidacy has brought intense scrutiny to how private equity operates and new accusations against the industry. In January, for example, a super PAC supporting Newt Gingrich released a half-hour documentary accusing Romney — and, implicitly, much of the private equity industry — of profiting on the backs of the employees of the companies he invested in. “Romney and Bain upended the company and gutted the workforce,” a narrator said in the video, referring to one company that Bain took over. “Now they were ready to make a handsome profit.”

“There’s a shortage of good stories about regular private equity. The story most people are aware of is Gordon Gecko meets Barbarians at the Gate,” said David Snow, CEO of PrivCap, a private equity trade media company, referencing the evil corporate raider portrayed by Michael Douglas in the seminal Oliver Stone film “Wall Street” and the best-selling book that chronicles the botched takeover of RJR Nabisco in the late-’80s. The industry is “making sure there’s a counter narrative to private equity firms as marauding barbarians,” he said.

“There has been scrutiny in an unhealthy way,” agreed Stewart Kohl, co-CEO of Cleveland-based Riverside Co., a middle-market private equity firm. “The risk is we will be treated as equivalent to the most vilified institutions that contributed to the global financial crisis of 2008.”

The recent criticism has led to a lobbying and public relations pushback, based in part on fears that all this anger could result in costly new legislative or regulatory controls. The industry might have reason to be nervous: Late last year, the Securities and Exchange Commission reportedly sent letters to a number of private equity firms in the U.S. notifying them that they were subject of an informal inquiry into how they value the private companies in which they invest.

The letter foreshadowed a bevy of new calls this past week from world leaders and U.S. legislators to raise taxes on private equity profits, known as carried interest. On Tuesday, Rep. Sander Levin (D-Mich.) introduced a bill that would tax carried interest as ordinary income at a rate of up to 35 percent, compared with its current 20 percent. Levin’s bill introduction coincided that day with the initial filing deadline of a Dodd-Frank provision requiring private equity firms to now register with the federal government.

On the frontline of the industry’s resistance is the Private Equity Growth Capital Counsel, the industry’s lead lobby, which recently launched a public relations campaign that in part chronicles what the industry regards as its most successful and fruitful investments. “We plan to aggressively defend against mischaracterizations and attacks that occur over the coming months,” Ken Spain, the lobby group’s vice president of public affairs and communications, said in a statement to The Huffington Post.

But the lobby group isn’t alone. Across the industry, private equity firms have begun to speak up, viewing Wall Street as something of a cautionary tale. They don’t want to meet the same fate as the big banks when it comes to federal oversight. “One day, we’re going to wake up and there’s going to be a set of laws regulations and restrictions that are going to make it difficult or impossible for us do what we do,” said Riverside’s Kohl. “We don’t want to be thrown out with the Wall Street bathwater.”

Source:  Huffington Post

Posted by Steven Maimes, The Trust Advisor.



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Romney Tax Break Rejected as Welfare for Rich in Investor Poll

Most international investors say a tax break allowing private equity and hedge-fund executives to pay lower tax rates than many average Americans isn’t warranted, according to a Bloomberg survey.

As the release of Republican presidential candidate Mitt Romney’s 2010 tax return heats up debate over a 15 percent top rate on so-called carried interest, two-thirds of those surveyed in the Bloomberg Global Poll say the tax break is unjustified. The lower levy helped Romney, former head of Bain Capital LLC, pay an effective rate of 13.9 percent on $21.6 million of income, when the top income tax rate is 35 percent.

Jonathan Sadowsky, chief investment officer at Vaca Creek Asset Management LLC in San Francisco, said he favors eliminating the break because he’s concerned about government deficit spending.

“I’m extremely worried about the debt,” he said. “Somewhere down the line, people are going to stop lending us money.”

About $7.4 million, more than one-third of Romney’s 2010 income, was from carried interest, which is the share of profits that make up most of the compensation for partners in private equity firms, hedge funds and real estate developments. Those fees are taxed as capital gains rather than ordinary income.

Sixty-six percent of poll respondents worldwide said the break isn’t justified, compared with 21 percent who said it is and 13 percent who said they had “no idea.” Among those living in the U.S., 67 percent said the lower rate isn’t justified, versus 27 percent who said it is. The Jan. 23-24 poll of 1,209 investors, analysts and traders from around the world has a margin of error of plus or minus 2.8 percentage points.

Economic Fairness

The survey bolsters the position of Democrats who have pushed for years to eliminate the special treatment of carried interest. Romney’s use of the break has renewed scrutiny as President Barack Obama makes economic fairness a theme in his re-election campaign and studies show that income inequality has grown dramatically over the past quarter-century.

Democrats have won high-profile allies on the issue, including billionaire Warren Buffett, Blackstone Group LP co- founder Pete Peterson and New York City Mayor Michael Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP. Obama invited Buffett’s secretary to the Jan. 24 State of the Union address to highlight the Berkshire Hathaway Inc. chairman’s comments that he shouldn’t pay a lower tax rate than his employees.

Buffett Rule

In the State of the Union speech, Obama outlined a so-called Buffett Rule that would require people making $1 million or more to pay at least 30 percent in taxes.

Democrats are pushing to use repeal of special treatment for carried interest to help finance a payroll-tax break that expires at the end of next month as well as to prevent $1 trillion in automatic spending cuts set to begin taking effect at the end of the year. Republicans have blocked moves to raise the carried-interest rate, saying it will hurt the recovering economy.

Taxing carried interest as ordinary income would produce about $22 billion over a decade, according to the nonpartisan Congressional Budget Office.

Gerhard Summerer, president of DZ Financial Markets LLC in New York, said the lower rate is nothing more than “welfare for the rich,” saying the “average American citizen” gets no such breaks. “No one is advocating confiscating anyone’s possessions, but the fair taxation of income,” he said.

The revenue lost to the Treasury makes it more likely that lawmakers, under pressure to reduce the deficit, will have to cut services to lower-income Americans, said Sadowsky.

‘Misallocation of Capital’

“Who pays for that loss of revenue now that the government is short?” Sadowsky said. “Yup, the lower and middle class. So we have a misallocation of capital and resources from the poor and middle class to the rich.”

The carried interest debate is getting mixed up with an “entirely different” issue of “extremely wealthy people” who are “paying extremely low tax rates, which doesn’t exactly sit too well with a struggling economy,” said Andrew Paolillo, a portfolio manager at Rocky Hill Advisors Inc. in Peabody, Massachusetts, who defended the lower tax rate.

“Carried interest from an investment in a fund is more similar to simply buying shares of a stock than receiving a salary,” he said in an e-mail. “It is earning money from money previously invested, instead of earning money for services rendered.”

‘Scream Bloody Murder’

Christian Thwaites, president and chief executive officer of Sentinel Investments in Montpelier, Vermont, scoffed at complaints that a tax increase would be a blow to the private- equity industry.

“I’m sure they’d scream bloody murder and say this is the end of the world, but I just can’t believe it,” said Thwaites. “There’s plenty of reasons to be in private equity other than just the fact that you get a 20 percent tax improvement.” There are “still going to be pretty decent returns available” even if the tax rate is raised, he said.

Others said they don’t think it makes sense to treat carried interest as anything other than income subject to regular rates.

“It is used to pay bonuses to general partners, and I see no reason why bonuses should not be treated as income,” said Don Lindsey, chief investment officer for George Washington University in Washington.

John Boland, co-founder of Maple Capital Management in Montpelier, Vermont, said “if it looks like a duck and quacks, calling it a chicken does not change the fact it is duck, to paraphrase Ronald Reagan.”

Source: Bloomberg

Posted by Steven Maimes, The Trust Advisor.



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