There is momentum in Washington to lighten the regulatory burden on private equity.
That was the sentiment expressed by speakers at the Association for Corporate Growth’s 2017 Middle Market Public Policy Forum in late September.
And while that momentum may be building, it doesn’t mean the industry is likely to see any wholesale rollback of regulations that started with the Dodd-Frank Financial Reform Act of 2010. There is too much contention around Wall Street versus Main Street — with private equity lumped into the Wall Street category.
What’s more likely is piecemeal changes to specific regulatory details that don’t make much sense for PE. Like auditing requirements for holding companies that are formed solely to filter investment capital from funds to target companies. Or the mandate that firms track insider trading even though they invest only in private companies.
Lobbyists have been up and down Capitol Hill trying to educate members of Congress about the issues vital to private equity, including elimination of the interest-expense deduction. That was on everyone’s tongue at the ACG event because the tax-reform framework issued by GOP leaders and President Donald Trump included reducing or eliminating this deduction, which the industry considers so important.
Gretchen Perkins, a partner at Huron Capital Partners who works on ACG’s public-policy committee, said ACG held a number of meetings with members of Congress in late September to educate them on the interest-expense deduction and why eliminating or reducing it would amount to a tax on business.
The deduction is important not just to private equity but to small businesses across the country that use debt for things like paying their employees, she said.
Congress members were receptive to the meetings, but the final outcome of the meetings is up in the air because no one is really sure what the end result of the tax-reform push will look like.
Many say tax reform will not come close the broad proposals in the framework because of a few deductions that will be heavily contested. The elimination of the state and local tax deduction, for example, will be opposed by politicians from both parties who live in high-tax states like California, New York, New Jersey and Illinois.
On the other hand, a plan that isn’t revenue-neutral also likely won’t receive support because most politicians aren’t keen on building the national debt.
Private equity is in an interesting position right now, with a seemingly pro-business administration that nevertheless touts a populist message that the middle class has been ripped off by Wall Street. So pro-business right now doesn’t necessarily equal PE-friendly.
It will be interesting to see how all this shakes out — or whether the administration is able to enact any sort of change of substance. There’s been a lot of bluster but not much blush.
Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky