The Service Employees International Union has expressed a number of complaints about private equity firms: they aren’t socially responsible, they deplete a company’s cash reserves, and they take on too much risk, to name a few. But for this event, the SEIU kept it simple: Change carried interest tax law, or in the words of a rally poster, “No Tax Breaks For Buyout CEOS.”
One thing I noticed about SEIU’s message during “The Great Debates” panel at Buyouts East is that it’s simple and catchy, but doesn’t always examine the nuances of a situation; it doesn’t always “get it.” And that’s what a lot of the crowd looked like at this protest. Other than 40 or so people in the front, most of the rally’s attendants looked hot, unengaged, and content to chat among themselves. I can’t blame them. Private equity is complicated, difficult to understand, and even a little bit boring (admit it, nothing kills a conversation like leveraged lending).
But here is where I take issue. It is one thing to simplify a message in order to get people behind it. But vilifying the entire industry isn’t going to win me over. (There were accusations of “secret shareholder meetings.”). The message seemed to be that private equity, along with Henry Kravis, money, suits and big business, is evil. The rallying cry called for health care for all workers, which I agree is necessary, but the protesters would have me believe it’s as simple as “taking our money back.”
First of all, a carried interest tax hike—if passed—would be used to replace existing revenue from the outdated AMT tax. No new money for health care here. Secondly, the carried interest income lining Henry Kravis’s pockets isn’t being stripped from the companies he owns or their employees, it’s generated when a company that his firm improved is sold for more than it was bought for. Why would someone pay a higher price for a business if it wasn’t more valuable? Which brings me to my point. Despite my ribbing of the corporate phrase “value creation,” I do believe private equity firms create value. Revisit last week’s Ernst & Young PE study, which concludes that, for the third year in a row, private equity has outperformed public benchmarks in both growth and enterprise value. (Studies on job growth haven’t excluded synthetic growth through add-on acquisitions, so I’m leaving that issue out of this.)
Private equity has its place. Perhaps it got bigger than it needed to be (rising tide, anyone?) and perhaps some firms make all their money on leverage and carried interest. But if we’re going to point the finger of evil, let’s keep in mind that public companies cut costs and health care, too. And think of all the once-struggling but now-thriving businesses that wouldn’t be around if not for turnaround shops.
But enough cheerleading, because I happen to agree that carried interest should be taxed as ordinary income. Plenty of alternative investment professionals I’ve talked to agree, too. Look at the testimony of InterMedia Partners’s Leo J. Hindery for further proof. It’s even been said that no matter who gets elected this fall, the carried interest jig is probably up. Obama will certainly approve of a hike; with McCain it’s less clear. A number of firms are planning for the change in their LP agreements.
But I ask you, SEIU, is it so hard to make that point without attacking the business of private equity? For me, the rallying cry of the SEIU and its partner, the Working Families Party, doesn’t add up. Sure, if the tax loophole gets closed, returns will surely take a hit, and Henry Kravis may take home a little less money. But that won’t make private equity disappear, or knock businesspeople down a whole tax bracket. And even more importantly, it won’t stop public pensions and institutional investors from earning returns from the best players in the asset class.
***More info on carried interest. peHub has covered the issue extensively, too.
***The Wall Street Journal pointed out yesterday that SEIU’s own pensions are underfunded.
***More protest coverage from The Guardian, DealZone, San Mateo County Times