The private-equity industry – a.k.a the buyouts business – is shifting into high gear as Mitt Romney moves toward sewing up the Republican presidential nomination and the election cycle moves inexorably toward its climax this November. Rather than ramping up its investment activity and maximizing its returns, its focus appears to be on promoting its virtues in the eyes of the general public.
What once was simply an intermittent series of e-mails in journalists’ inboxes drawing their attention to the business and the triumphs or issues that buyout funds believe to be crucial has become a blizzard of messages in the last month or two. In early January, publicists for the Private Equity Growth Capital Council sent out a copy of a New York Times article telling the story of how a private-equity firm saved the iconic, 132-year-old Oneida flatware company and the jobs of 450 employees. They also sent around editorials urging pension fund managers to stand firm and fight back against unfair attacks on the private-equity industry as one that makes profits for itself at the expense of the unemployed. The Oneida article alone arrived in the e-mail inbox of yours truly no fewer than three times; the announcement of the formation of a new industry education initiative, “Private Equity at Work,” arrived only twice.
The latter initiative is aimed at combating attacks on the buyout business that have found a receptive audience across the political spectrum. As Romney surged to the top of the polls in the race for the nomination, Democratic opponents and Republican rivals alike were happy to draw attention to the contrast between the candidate’s wealth and the fact that the companies acquired by private-equity partnerships in hopes of making money are often subjected to “tough love” in the form of job cuts and factory closures. While promoting the virtues of an industry that does such politically unpalatable things in order to make a buck isn’t as difficult as, say, trying to craft a new public image for Voldemort, it still ain’t easy. And that’s not because, as the industry association claims, the public doesn’t understand what it is that they do.
On the contrary, the public “gets” the private-equity business pretty well – better, indeed, than it understands much of the rest of Wall Street. Take a money-losing company, acquire it (using a lot of debt that is most often attached to the company itself), put it through a tough process to make it profitable, one that often requires layoffs and plant closures – and then sell it for a profit.
The very reason that the pension fund manager to which the private-equity folks are appealing might stand up to defend the industry is the very reason it is being criticized in the first place. The industry has outperformed publicly traded stocks – but the beneficiaries are its managers, like Mitt Romney. True, investors like pension funds – in which a number of workers still have a stake – benefit as well. But the number of potential workers who see no personal benefit from the buyout industry and who feel threatened by this kind of Darwinian process exceeds that number.
That’s not to say that the private-equity defenders don’t have reason on their side. Had those target companies not attracted the attention of buyout funds and been subjected to those overhauls, it’s very likely that their businesses would have collapsed completely, costing still more jobs. But, as President Obama has found in defending the stimulus, it’s hard to sell something as a success by comparing the results to what might have been. Audiences prepared to believe the worst of the private-equity industry aren’t going to be swayed by claims that 500 jobs here and 175 jobs there were saved. And who said that reasoned debate was a greater part of the presidential election cycle than emotions like fear?
Still, it’s hardly surprising that the buyout firms are banding together to try and address this anti-private-equity rhetoric. Even if their candidate doesn’t succeed in capturing the nomination or unseating Obama in the http://www.thefiscaltimes.com/Policy-Politics/Elections.aspx November election, one thing that is almost certain is that the debate over how the buyout firms are taxed will rear its head once more. When Romney disclosed that his effective tax rate was less than 15 percent, since the largest source of his earnings – carried interest on the private-equity partnerships in which he is an investor – is taxed as capital gains rather than income, the outraged expostulations could probably have been heard in the International Space Station. There is bipartisan objection to treating this income as ordinary income, which would more than double the rate at which it’s taxed, as some politicians side with the industry in saying this would stifle entrepreneurial activity by limiting the amount of capital that investors are willing to put to work in these funds.
This issue has surfaced again and again over the last five years, and is likely to do so once more during the election campaign (especially if Romney wins the nomination) and continue regardless of who occupies the White House in 2013. The private-equity lobbying group may be fighting an uphill battle when it tries to convince the public that it’s a benign business model aimed at rescuing troubled companies, not destroying them. But it’s one they have to win if they are to emerge victorious in the war over how they are taxed and whether they’ll be able to hang on to all those gains.