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The state of private equity

All eyes were on our financial institutions during the financial crisis. It was a time, appropriately, to correct the practices that contributed to our nation’s economic distress.

We have come a long way in doing so. With an economy displaying year-over-year growth, it is time to broaden our focus from preventing the re-occurrence of what went wrong, and incent the business models that have moved us in the right direction.

What are these positive economic drivers – both for the investment community and the middle class? Which financial structures are not only performing well, but are shaping long-term growth? The private equity industry is at the top of these lists.

Cambridge Associates estimates that investors in private equity received a total return of nearly $130 billion last year. This total is close to the $135 billion returned to investors in 2013, and both of these distributions are higher than the $118 billion returned in 2012. This is an impressive trend.

Just as exciting and perhaps more important, the success of the industry is a success for the middle class. Private equity returns to public pension funds are their highest performing asset class at 12.3 percent, net of fees. These superior returns help secure the retirements of our nation’s hardworking teachers, firefighters and police officers. According to a recent study by the Private Equity Growth Capital Council, over 13 million retirees benefit or will benefit from these investments within large U.S. public pension funds.

It may come as a surprise, but chances are good you know someone who is employed by a private equity-backed company. As of the end of 2013, private equity was sponsoring over 11,000 unique U.S. based companies that employed 7.5 million people. All across America, from large, familiar brands to small manufacturing facilities, private equity is strengthening companies and making them more competitive.

Another surprise? How private equity is doing it. A number of firms have begun to partner with leading non-profits such as the Environmental Defense Fund to examine the relationship between business and the environment. Private equity firms drive value through better business performance: more efficient supply chains, reduced fuel and water costs, and new products and services. These operational changes impact more than the bottom line. They have a measurable impact on the environment, and can add value to both a company and a community.

Still, the industry is not without its critics. Headline grabbing stories – some more accurate than others – on issues related to fees and industry standards have hit the front pages. Often, these stories inform the opinion of lawmakers, and this poses a challenge for private equity firms as the discussion moves from the media to Capitol Hill.

A main industry concern is misguided regulation. There is a prevailing sense that a broad-brush approach was taken in the implementation of the Dodd-Frank Act, which was designed to remove systemic risk from our markets. As a result, industries that do not pose a systemic risk, such as private equity, have since been subjected to undue regulatory burdens. Some regulators have maintained this one-size-fits-all approach, and private equity firms and the role of private equity advisers continue to be misclassified. It’s time to fix this.

Along with regulations, the private equity industry is continuing to address tax-related threats. The longstanding tax treatment of carried interest and interest deductibility plays a crucial role in private equity investing, and as tax reform talks continue on Capitol Hill, it is important these policies are preserved. There have also been suggestions that as part of tax reform, a new entity level tax should be imposed on partnerships, including venture capital, real estate, and private equity partnerships. This would be an additional tax burden that would effectively amount to triple taxation for private equity firms. Private equity is a dynamic industry, but it needs the stability that comes with a predictable and fair tax policy.

The financial crisis required a critical examination of our financial system. Businesses and our government found serious problems and they have, by and large, addressed them. Now, it is time to look just as closely at what has worked for our nation, and what provides the engine for future growth. It is time to support these business models to ensure we keep moving forward.

If we do this, private equity will continue to make our marketplace more competitive, make our companies stronger, and make all of America more prosperous.

Steve Judge is the President and CEO of the Private Equity Growth Capital Council.