Private Equity Wields More Power Than Ever as Warren Picks Fight
Private Equity Flexes Muscle in Washington as Warren Picks Fight
(Bloomberg) -- It was “Barbarians at the Gate,” Washington-style.
As Republicans set out to overhaul the federal tax code in 2017, the private equity world leveraged its influence. The mission: protect the wildly lucrative tax break that’s helped mint more billionaires than almost any other industry.
The original Barbarian -- KKR & Co. -- had none other than a former head of the Republican National Committee rounding up lawmakers on Capitol Hill to fight for private equity’s cause.
Quietly meeting with Treasury Secretary Steven Mnuchin and top economic advisers was industry mogul Jonathan Gray, the No. 2 at Blackstone Group Inc. who’s famous for devising the $26 billion takeover of the Hilton hotel chain.
As lobbyists worked toward a compromise that would keep the tax benefit alive, Blackstone co-founder Steve Schwarzman was enjoying direct access to President Donald Trump. Worth $16.1 billion, Schwarzman happens to be the president’s Palm Beach neighbor, a regular guest at his Mar-a-Lago resort and one of his most generous donors.
And so went private equity’s latest feat in Washington: Despite dozens of attempts to close that crucial loophole -- a multibillion-dollar giveaway on so-called carried interest that Trump himself had pledged to junk -- the idea simply went away. Congress kept the existing system with a stipulation that money managers must hold their positions for three years. They usually do anyway.
The day the Senate passed the law preserving the tax break, Schwarzman hosted a fundraiser at his Manhattan apartment for the president. Guests paid $100,000 a plate.
An industry that’s reshaped the American economy now appears to be heading into an even bigger war to preserve the generous tax breaks and loose oversight that helped it amass more than $4 trillion in assets and launch a new Gilded Age. Senator Elizabeth Warren, climbing in polls as she seeks the Democratic presidential nomination, has laid out proposals that would dramatically rein in its profits if she’s elected next year.
She and some of her fellow candidates are picking a fight with a group of Wall Street firms more powerful than ever. They’ve evolved from mere buyout funds that use debt to acquire companies like RJR Nabisco, featured in the 1990s book “Barbarians at the Gate,” into major players in real estate, credit and other businesses. They hold sway in virtually every corner of the economy, as well as with millions of employees who will vote in 2020.
Major Donors
Over the past decade, private equity and investment firms -- not including hedge funds -- have dropped $400 million into federal campaign coffers, according the Center for Responsive Politics. That’s more than commercial banks or the insurance industry.
Leading private equity’s charge in Washington is the prosaically named American Investment Council. Headquartered about 2 miles from the Capitol, it’s backed by outfits such as Carlyle Group LP, Apollo Global Management Inc. and Blackstone, giving it the resources to cast a message nationally. The AIC regularly places opinion pieces in local newspapers to burnish the industry’s reputation, often noting that the firms control companies employing thousands of area residents.
“Businesses backed by private equity employ over 11,800 workers in the Hawkeye state,” AIC president Drew Maloney, who served as a liaison between the Treasury Department and Congress earlier in the Trump administration, wrote in Iowa’s Des Moines Register in July. “Real jobs. Real lives.”
The industry has shown a knack for hiring Beltway insiders who can navigate both Republican and Democratic circles. This month, the AIC plans to bring CEOs of private-equity-owned companies to Washington to chat with lawmakers across the spectrum. “They have managed to have influence with both parties,” said John Coffee, a law professor at Columbia University.
Republican Support
Take Ken Mehlman, KKR’s political whiz who held various positions in the George W. Bush administration, managing his 2004 re-election campaign and then chairing the RNC.
In mid-2017, as Republicans were racing to come up with a tax overhaul for Trump, Mehlman helped persuade House Republicans to protect the carried interest loophole that makes it possible for wealthy executives to pay lower tax rates than their secretaries.
The money managers get paid in two ways: an annual management fee and a share of investment profits. While the fee is taxed as ordinary income, the profit share is treated like a capital gain and taxed less. Critics say this doesn’t make sense because the profit share is essentially just another fee paid by clients.
After an effort spearheaded by Mehlman, 22 Republican congressmen signed a letter to the powerful House Ways and Means Committee arguing the break is good for the country. “Now, more than ever, we need a tax reform package that bolsters long-term investment in American companies,” they wrote. “Carried interest does exactly that.”
‘Almost No’ Regulation
Top private equity firms now wield assets that dwarf those of regional banks such as Fifth Third Bancorp and Citizens Financial Group Inc. But unlike banks, they mostly fall through the regulatory cracks.
Congress tried to tighten one of the industry’s favorite loopholes after the 2008 financial crisis. The aim was to force private equity firms to abide by many of the routine requirements -- compliance programs, inspections, disclosures on assets -- that other investment companies have faced since the 1940s.
By 2014, officials at the Securities and Exchange Commission had taken up the cause, talking about the need for more transparency, or as they called it, “spreading sunshine.” Yet behind the scenes, congressional staffers close to the industry were encouraging the SEC to focus elsewhere.
“Private equity is subject to almost no direct regulation beyond some very basic transparency,” said Jonah Crane, a senior official at Treasury Department official during the Obama administration.
Easing Rules
Recently, SEC Chairman Jay Clayton, who was picked for the job by Trump, has considered developing an inexpensive way for everyday investors to participate in private equity. They’ve long been barred on the grounds they aren’t sophisticated enough to take such risks.
In an April interview on Bloomberg TV’s “The David Rubenstein Show,” the SEC chairman said many people might benefit from having a slice of their retirement money in private equity. The host, a co-founder of Carlyle, agreed. “Probably wouldn’t be that damaging if 5% of it was lost or didn’t do as well,” Rubenstein said, speaking of retiree nest eggs. “So some percentage maybe should be allowed.”
The SEC has since solicited public comments on whether it should ease the rules. The aim is to “reduce cost and complexity, and increase opportunities” while enhancing protections, said Natalie Strom, a spokeswoman for Clayton.
Representatives for KKR, Blackstone and Carlyle declined to comment.
Limiting Disclosures
Sensing an opening, private equity is pushing back on other requirements, too.
Among the few windows the government has into private equity and the risks that firms take is a form filed with the SEC known as PF. Its Section 4 can reveal the amount of debt piled onto the companies in buyouts, as well as where firms are investing. Years ago, private equity firms successfully lobbied to limit access to the information, saying it’s proprietary. Only about a dozen of the SEC’s 4,400 employees can easily see it.
Now, the industry is criticizing the disclosures, calling them a security risk. It argues so few people have access to the data that it can’t be of much use, anyway.
The SEC takes “data protection very seriously,” Clayton’s spokeswoman said. His office said in a statement that officials met with industry and investor groups about Form PF and that there’s no plan to cut out sections of the document.
Warren’s Proposals
Senator Warren, for one, is outraged about the industry’s clout. Her plan is called the “Stop Wall Street Looting Act.” Unveiled in July, her measures would close the carried interest loophole, put firms on the hook for the debts of companies they buy and eliminate certain fees.
Then this week she and other progressive Democrats sent letters to private equity firms invested in prison services, demanding information about stakes, revenue and whether facilities have been investigated for violating laws.
“For far too long, the private equity industry -- with its armies of lobbyists and lawyers -- has rigged the rules in Washington, allowing private investment firms to line their pockets by sucking the value out of American businesses and leaving employees, pensioners, and communities behind,” the Massachusetts Democrat said. “This legalized looting is costing our economy, and it’s time we put an end to it.”
--With assistance from Robert Schmidt and Austin Weinstein.
To contact the reporters on this story: Heather Perlberg in Washington at hperlberg@bloomberg.net;Ben Bain in Washington at bbain2@bloomberg.net
To contact the editors responsible for this story: David Gillen at dgillen3@bloomberg.net, ;Alan Mirabella at amirabella@bloomberg.net, ;Jesse Westbrook at jwestbrook1@bloomberg.net, David Scheer, Josh Friedman
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