In a March post, “Private Equity’s Image Problem,” we expressed considerable reservations about Blackstone’e effort to form a lobbying group (the Private Equity Council) to among other things, press for the continued favorable tax treatment of carried interest, and specifically, the approach taken by its leader. From that post:
So the industry could use some good PR. But, based on a Financial Times story, “Private equity slams ‘hostility’,” these efforts appear to be getting off on the wrong foot:
The head of the US’s first private equity lobby group has hit out at the “extremely low” understanding of the industry by policymakers as the sector launches its first campaign to head off public criticism of its growing role in the economy.
Douglas Lowenstein, a veteran lobbyist recently named by 10 of the largest buy-out groups to head the Private Equity Council, told the Financial Times the body would set out to prove that the industry’s deal-making benefits the whole economy.
Now I am not a lobbyist, but telling your counterparties that they are ignorant at a minimum isn’t very polite, and it comes dangerously close to sounding like you are telling them they are stupid. And you’ve just treated them as opponents, when there might have been a way to find common ground.
Now I don’t know where the industry found this guy, but his previous claim to fame was that he was head lobbyist for the videogames industry. Query how much that has in common with private equity. As I recall, the most contentious issue they had to face was the charge that their games were too violent. That puts them, Hollywood, and the TV industry on the same side of the table against worried mothers and a few shrinks. That isn’t much of a contest.
Plus he is missing how the whole basis of discourse is changing. He says he will “prove” that private equity benefits the economy “as a whole.” It may in the GDP sense, but it is unarguable that many private equity firms cut costs, often by cutting headcount, and they tend to be more aggressive about it than public companies. Now that may in the end lead to more productive businesses, but in the short run, it leads to job losses. No matter how the buyout firms dress it up, there is an element of wealth transfer: cost cuts that hurt the little guy benefit the private equity firm owners, their investors, and the top management team that has an equity stake.
Our reservations were well founded. A Bloomberg story reports that the ham-handed efforts of the Private Equity Councilmay have worsened the industry’s standing in Washington.
The fact that Blackstone couldn’t hire and manage a lobbyist is at odds with their claim that they are particularly skilled at evaluating and working with taleneted executives.
Blackstone Group LP and other private-equity firms are learning that money doesn’t always buy love in the U.S. Congress.
In trying to block legislative proposals that could more than double their taxes, the buyout firms have failed to build a broad-based coalition, attacked powerful lawmakers and been disavowed by minority groups and pension funds they claimed as allies….
While the outcome of the tax battle is far from certain, these early missteps have set back private equity’s first large- scale foray into lobbying. That effort cost the firms at least $5.5 million during the first six months of 2007, almost four times as much as they spent in all of 2006.
Lawmakers cite as one example of overreaching the effort by allies of the Private Equity Council — a Washington lobbying group established last year by 11 buyout firms including Blackstone, the Carlyle Group, Apollo Management LP, Bain Capital LLC, Madison Dearborn Partners LLC and KKR & Co. LP — to justify the lower tax rate as a boon to poor communities.
The council helped fund a coalition of minority and women investors including Robert Johnson, a billionaire who founded Black Entertainment Television, and former basketball star Earvin “Magic” Johnson to lobby against the tax increase on Capitol Hill.
One lawmaker the industry sought to sway was Ohio Representative Stephanie Tubbs Jones, a black Democrat who serves on the Ways and Means Committee. She is a co-sponsor of a House proposal that would tax the share of profits fund managers receive for investment services, known as carried interest, at rates as high as 37.9 percent instead of the 15 percent capital- gains rate.
Tubbs Jones, 58, said a visit by black investors who told her that the lower tax rate was needed to encourage development in depressed communities hadn’t changed her position. The legislation “was not the vehicle in which to be successful with the argument,” she said in an interview.
The Ways and Means Committee chairman, Representative Charles Rangel of New York, who is the first black lawmaker to hold that post, also dismissed the arguments. “It’s going to be hard for me to draft a minority and women set-aside to rip off the system,” Rangel, 77, said Sept. 7.
Groups that advocate investment in poor areas say a low tax rate isn’t needed to encourage such projects. Thirty-four national organizations, including the AFL-CIO, the largest federation of U.S. labor unions, have formed their own coalition to support the legislation.
Robert Stewart, a spokesman for the Private Equity Council, said the group has made “significant progress.”
“Just a few months ago, conventional wisdom was that a tax hike on carried interest in 2007 was inevitable,” he said. “Today, that is no longer the case.”
The private-equity industry also has criticized Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and the panel’s top Republican, Charles Grassley of Iowa, the authors of Senate legislation to raise taxes on publicly traded hedge funds and private-equity firms such as Blackstone.
In an Aug. 23 letter to Democratic Senator John Kerry of Massachusetts, who also serves on the Finance Committee, Blackstone suggested Baucus and Grassley were unfairly singling out private-equity firms while preserving a similar tax break for their states’ ethanol producers.
“The only explanation for this glaring inconsistency is that the ethanol and energy industries are important to the states of Iowa and Montana and the financial-services industries based on the east and west coasts and in other large cities are not,” the firm said.
Carol Guthrie, a spokeswoman for Baucus, didn’t respond to a request for comment. Jill Gerber, a Grassley spokeswoman, had no immediate comment.
John Ford, a spokesman for New York-based Blackstone, declined to comment.
The industry’s lobbying effort has met with setbacks on other fronts, as pension funds rejected the arguments of private equity firms that higher taxes would cut into workers’ retirement savings.
The National Conference on Public Employee Retirement Systems earlier this month repudiated its position that the tax increase would lower returns for their investors. The California Public Employees’ Retirement System, the largest U.S. public pension fund, said at a congressional hearing that higher taxes would have little impact.
The private-equity industry has also been unable to enlist larger trade groups such as the National Association of Manufacturers and the Business Roundtable that were mainstays of the coalition that helped push through President George W. Bush’s 2001 and 2003 tax cuts.
Last week, the industry suffered another defection as the National Venture Capital Association said it had begun pushing lawmakers to exclude its members from any tax increase. NVCA board members said their industry deserves the lower rate as a reward for risk because, unlike private-equity firms, they create companies from the ground up.