As the private equity industry sweats under the hot lights of US congressional scrutiny in today’s Senate Finance Committee hearings on the taxation of carried interest, the Private Equity Council has released its first white paper in defence of the industry. The paper, “Public Value: A Primer Equity”, outlines the benefits of private equity that accrue to limited partners, portfolio companies and the public at large.
Download a copy of the white paper here.
In the paper, the PEC stresses that companies owned by top private equity firms “consistently outperformed the market”, citing research done by Josh Lerner of the Harvard Business School and Jerry Cao of Boston University. The paper also emphasizes that “limited partner investors reap the overwhelming majority of the gains”, a rebuttal to the charge frequently leveled at the private equity industry that primarily general partners benefit from successful exits. The PEC points out that many of these LPs are pension funds, endowments, and foundations.
The white paper also combats another frequent criticism of private equity, that the industry’s gains are the result of financial engineering alone. Using recent high profile purchases and turnarounds such as Dunkin’ Brands and Toys ’R Us as examples, the PEC claims that because of increasing competition among private equity firms for deals, firms must truly add value by “rolling up their sleeves to improve the operations of the businesses they acquire as ‘active owners’”. Along these lines, the white paper also explains in detail how taking a firm private aligns the interests of the owners and the managers by eliminating the pressure on managers to produce short term earnings results.
The paper spends just one paragraph in the twenty page report discussing labour, one of the most contentious issues for private equity’s critics. This section cites a study by the British Venture Capital Association that found that between 2000 and 2004, “employment in private equity-backed companies rose by 5.4 percent, almost eight times higher than the European Union average of 0.7 percent”.
The PEC, which was formed in February, represents 11 of the largest private equity firms and lobbies for the industry as a whole. The industry has come under scrutiny on several fronts recently. Senate Finance Committee chairman Max Baucus and ranking member Charles Grassley introduced a bill last month that, if passed, will increase taxes on publicly traded partnerships. The House Ways and Means Committee plans to hold a hearing on the subject this summer.
There has also been a push to tax carried interest as income rather than as capital gains, an issue that is the subject of today’s Senate Finance Committee hearing, “Carried Interest Part I”. The committee has scheduled five witnesses: Eric Solomon, assistant secretary for tax policy at the Treasury department, Peter Orszag, director of the Congressional Budget Office, Andrew Donahue, director of the Division of Investment Management at the Securities and Exchange Commission, Kate Mitchell, a managing director at Scale Venture Partners, and Marc Gergen, a professor at the University of Texas School of Law.
Also scheduled to start today is a hearing in the House Financial Services Committee: “Hedge Funds and Systemic Risk: Perspectives of The President’s Working Group on Financial Markets”. The PEC’s white paper devotes a section to distinguishing between private equity firms and hedge funds.
The National Venture Capital Association, a lobbying group for the VC industry, recently came out with its own white paper, “The Economic Importance of Venture Capital Backed Companies to the US Economy”, which argues that VC creates jobs and revenues and improves the health of the economy.