Private Equity Becomes a Political Issue – Again

July 23, 2019

If you’ve been around the private equity industry long enough, you know that presidential elections bring up strong feelings on the issue.  Based upon what has been said in the past couple of weeks, the private equity industry is again a lighting rod for political posturing.  A look at what some of the recent comments made by leading democratic presidential candidate Elizabeth Warren follows. 

(Please note that no political leanings are meant to be inferred here.  Whether one votes Republican or Democrat is just fine – this article simply looks at the policy issues being discussed).

“Putting Private Equity on the Hook”

One of the suggestions Senator Warren (and many of her democratic colleagues) have mentioned is putting private equity firms on the hook for debts of companies they buy.  In theory, proponents of this idea think that such a requirement would make private equity professionals responsible for the downside of their investments so that they only make money if the companies they control flourish.

The American Investment Council, a lobbying group for the private equity industry, was not favorable to Senator Warren’s proposals: “Private equity is an engine for American growth and innovation – especially in Warren’s home state of Massachusetts.  Extreme political plans only hurt workers, investment and out economy,” said the group.

“Private Equity Firms Responsible for Pension Obligations”

Some critics of the private equity industry claim that private equity firms act like vampires, sucking the blood out of the companies they invest in before leaving the company to rot after all the blood has been sucked out.  Whether this is an accurate portrayal or not is a political question, but opponents of the proposal argue that “Senator Warren’s financial service plan to limit private equity firms is another brick in the wall to stop growth, job creation and creating return for retirement.” (Tom Quaadman, US Chamber of Commerce)

“Eliminating Private Equity Firms’ Ability to Pay Themselves Monitoring Fees and Paying Dividends to Themselves”

This idea has its root in the nature of private equity funding.  Most of the work performed by private equity professionals is on the front end, where professionals make decisions about what companies get funded and by how much. 

After an initial investment, private equity firms monitor investments, which basically means reading news reports and crunching numbers every now and then.  It’s simple work, and some say that the private equity industry is way overpaid for such work.  This characterization may be true but forgets the amount of risk private equity firms are taking with the initial investments.  At the end of the day, this suggestion is another political question to be decided in the polls.

“Altering Tax Rules So That Private Equity Deals Don’t Get Lower Tax Rates on the Debt Placed with Purchased Companies”

This suggestion is hotly debated.  Does the debt private equity firms put on acquired firms improve or deteriorate the condition of acquired firms?  Unsurprisingly, the answer to this question is it depends.  Should this aspect of private equity financing change, it would likely change the nature of private equity practice forever.  Opponents would suggest that pro-private equity reform advocates tread lightly in this area.

“Closing the Carried Interest Loophole”

The last issue mentioned here (although nowhere near the last suggestion on potential regulatory changes for the private equity industry) is closing the carried interest loophole.  In theory, the idea here is to make it so that the money private equity professionals make is taxed similar to wages rather than capital gains.  As with the previous suggestions, whether the money the private equity industry makes is wage income or capital gains largely depends upon one’s political philosophy.

These issues are only a portion of the ideas that have been floated to change the way the private equity industry operates.  Whether they go anywhere beyond political posturing is a question of election success – it seems important, though, that private equity professionals keep themselves afoot of potential changes coming down the pike.

Conclusion

Private equity – again – appears as a hot button issue in the presidential election.  After moves by the Trump administration to deregulate the financial services industry, democratic presidential candidates are taking aim at re-regulating and/or imposing new regulations on the industry.  At least for the coming year, the practices of the private equity industry will continue to be a much-discussed issue on the campaign trail.

Leave a Comment

Previous post:

Next post:

Real Time Web Analytics