The 2012 US presidential race is heating up despite election day being13 months away. As it’s that far out, why should we pay attention? Well, there’s a lot at stake for fund managers and the individual that occupies the White House will set the tone for the regulatory and tax initiatives nearest and dearest to private equity managers.
The Dodd-Frank Act, which was enacted under President Barack Obama’s watch on 21 July 2010, marked the beginning of transformational change in the regulation of the US private equity industry. It’s an issue that serves as the centerpiece for several Republican presidential candidates.
Due to Dodd-Frank, private equity funds managing more than $150 million in assets will have to register with the US Securities and Exchange Commission by 30 March 2012, appoint a chief compliance officer, adopt comprehensive compliance policies and procedures specifically tailored to the compliance risks by their operations and review such policies and procedures on an annual basis.
Now that Dodd-Frank is on the books, several Republican presidential candidates, with varying degrees of ferocity, are calling for the repeal of the law.
The big picture, however, is who private equity managers prefer to face off with President Obama next November. Some managers are more vocal than others.
Tony James, president and COO of The Blackstone Group, said on CNBC in September that Mitt Romney might be an easy target for Democrats. “I suspect that if Mitt Romney gets the Republican nomination it will get worse because I think his Achilles Heel… the Democrats will…attack him on private equity just as Teddy Kennedy did in Massachusetts and I think they’ll villanise the industry even further. So I’m not sure it gets better, but it’s not right.”
Other GPs are taking a more measured approach, not daring to make a prediction, nor let on a preference. Head of Cerberus Capital Management Stephen Feinberg, speaking at a private equity conference in New York in late September, said: “It seems to be between Romney, who has a tremendous business background and Rick Perry who runs one of the largest states in the country. They seem like two pretty good guys, but we’ll wait and see.”
PE Manager takes a look at the eight remaining (at press time) Republican candidates, as well as President Obama, and their stance on tax and regulatory issues that impact private equity managers the most. Several attempts were made to speak to the candidates and members of their campaign staff, to no avail.
Mitt Romney
Former Massachusetts Governor Mitt Romney, who spent 14 years leading Bain Capital, should be the private equity industry’s darling. And Romney has some solid talking points that should appeal to the wider Republican crowd.
During his time at Bain, many portfolio companies flourished including office supply company Staples, which has created 90,000 jobs, and sporting goods chain Sports Authority, which created 15,000 jobs.
However, his private equity background has been a liability for Romney, as other candidates try to position themselves as champions for small business owners, not “corporate bigwigs”.
Indeed, Republican presidential candidates have begun to signal they will use Romney’s years at Bain Capital as a point of attack in an increasingly contentious fight for the White House. In the end this creates political pressures for an anti-private equity candidate who wins the White House to back antiprivate equity rules and regulations in kind.
At a recent campaign stop in Iowa, Rick Perry, the governor of Texas and fellow Republican candidate, was one of the first to go down this line, quipping: “I was in the private sector for 13 years after I left the Air Force. So I wasn’t on Wall Street, I wasn’t working at Bain Capital.”
Regarding financial regulation, Romney is firmly against the Dodd-Frank Act.
He has criticised Dodd-Frank for creating uncertainty in the financial industry, but strengthened his tone over the summer saying he would repeal Dodd-Frank if he were elected president. On a campaign stop in New Hampshire in July, Romney said, “The extent of regulation in the banking industry has become extraordinarily burdensome following Dodd-Frank. I’d like to repeal Dodd Frank, recognising that some revisions make sense.”
Romney said he believes it does make sense to regulate derivatives. He said it also makes sense to have different capital requirements if someone is holding a home mortgage compared to someone holding high-risk securities. “Some features have to be addressed,” he said.
While financial regulatory repeal is a strong issue, nothing stirs emotions in the private equity community like talk of hiking the carried interest tax rate.
In 2010, Blackstone co-founder Steve Schwarzman compared President Barack Obama’s proposal to tax carried interest as ordinary income to Hitler’s invasion of Poland. “It’s a war,” Schwarzman said. “It’s like when Hitler invaded Poland in 1939.”
Romney, who amassed part of his fortune from carried interest while at Bain, has long opposed taxing carry at the personal income rate.
Rick Perry
Rick Perry, the governor of Texas, is less transparent when it comes to private equity and a lot of questions remain, according to a Washington, DC-based lobbyist.
“It’s clear that he’s looking to private equity [GPs] for fundraising,” says the lobbyist. “He has made several trips to New York, some publicised, others not, but there is some uncertainty. He has not been clear on his carry [tax] stance. On Dodd-Frank, he’s been clearer.”
“I was in the private sector for 13 years after I left the Air Force. So I wasn’t on Wall Street, I wasn’t working at Bain Capital.”
Perry has called for the immediate repeal of the Dodd-Frank Act. During an August campaign stop in Iowa, Perry said of Dodd-Frank: “We have to end it right now”.
In September, Perry called for President Obama, who signed Dodd-Frank into law, to put a six-month suspension on all of the law’s pending regulations.
“One of my top priorities that I’ll share is to repeal this onerous Dodd-Frank regulatory legislation,” Perry said in Iowa. “And it’s no wonder that banks and credit unions are afraid to lend money, because it’s the onerous regulatory climate that’s killing the jobs, that’s killing this economy.”
However, it’s problematic that Perry is trying to fundraise from the same group that is a target, says the lobbyist. “During a September [Republican] debate, Perry blasted Romney’s Bain experience,” he says. “He’s walking a fine line.”
Michele Bachmann
Minnesota Representative Michele Bachmann has positioned herself as a fiscal conservative and was The Tea Party’s front-runner until Rick Perry entered the race. The Tea Party is a conservative subset of the Republican party.
Bachmann has regularly attacked financial reform and often reminds voters that she introduced the first Dodd-Frank repeal bill earlier this year.
As a member of the US House of Representatives in 2010, Bachmann, like Texas Representative Ron Paul, has the advantage of showing private equity managers and voters that she voted against Dodd-Frank while in congress.
She is equally fervent on tax hikes, directly addressing Warren Buffett’s comments on carried interest tax in August. “If Warren Buffett believes he doesn’t pay enough taxes, then he should write a check today to the Treasury, but he and the President shouldn’t enact warfare on the millions of small businesses, on charities and on middle class America with increased tax burdens.”
Indeed, Buffett wrote in a New York Times oped that “extraordinary tax breaks” for investment managers were like “blessings” that were “showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species”.
Buffett argued that carry ought to be taxed at personal income tax rates, as high as 35 percent, rather than at the 15 percent capital gains tax rate, a proposal President Obama agrees with.
“The president’s plan to raise taxes on the American people is the wrong policy to create economic growth and jobs and shows he doesn’t understand how to turn our economy around,” according to Bachmann’s campaign website. “The president’s gimmicks and tax increases on the backs of small business and the middle class won’t grow our economy… the president should allow for repatriation of American money overseas, truly reform the entire tax code so it is fairer and flatter on all Americans, and get rid of job killing regulations, which will create millions of jobs.”
Ron Paul
As president, Texas Representative Ron Paul would “support a Liberty Amendment to the Constitution to abolish income and death taxes. And he will be proud to be the one who finally turns off the lights at the [Internal Revenue Service] for good”, according to his campaign website.
His stance on tax reform is clear: “Capital gains taxes, which punish you for success (and interfere with your efforts to hedge against inflation by purchasing gold and silver coins), should also be immediately repealed,” according to Paul’s website.
When it comes to financial regulation, Paul is less focused on repealing Dodd-Frank, a bill he voted against, in favour of ending the Fed.
“Although Congress and the Treasury helped bring about the housing bubble and financial collapse with legislation, regulations, and keeping the funds flowing to reckless institutions like Fannie Mae and Freddie Mac, the Fed was the main cause of the crisis,” according to Paul’s campaign site. “Its interference in setting interest rates distorted the market, and its status as the ‘lender of last resort’ ensured banks could hook individuals and businesses for loans on projects that weren’t in as high demand as forecasters believed.”
Some GPs are unimpressed with Paul’s views on Dodd-Frank and his lack of business background.
“[Paul] voted against [the Dodd-Frank Act] in the House, which is great, but his focus is on the Fed,” says a New York-based chief compliance officer. “On a compliance level, his regulatory goals are too macro. We’re hoping for someone that understands the challenges. Ron isn’t that guy. He’s a physician first, politician second; business doesn’t factor in.”
Herman Cain
Like Bachmann, Georgia businessman Herman Cain has won accolades for being in favour of reducing the capital gains tax and suspending taxes on repatriated profits.
Cain believes that “meaningful tax reform should be implemented immediately to alleviate that suffocating tax burden placed on businesses and individuals in America”, according to his website.
He proposes to lower the top corporate and personal income tax rates to a maximum of 25 percent; eliminate taxes on repatriated profits; take the capital gains tax rate to zero; provide a full payroll tax holiday for both employers and employees for a single year; and make the tax rates permanent to quell economic uncertainty.
Cain also favours a long-term phase out of the entire tax code and replacing it with a national consumption tax, also known as the Fair Tax.
“Cain is an interesting side show to watch,” a New York-based CFO tells PE Manager. “There is a lot of respect for what he accomplished in the private sector, but his understanding of private equity is limited. During one of the [Republican primary] debates, Cain described what was essentially a hedge fund strategy when speaking about private equity. His tax views are interesting, but I don’t think he’s seen as an ally [in the private equity community],” says the CFO.
Cain also coined the term “financial regulatory deform” when speaking about the Dodd-Frank Act.
“This move for comprehensive reform, or really, deform, stems from the concerns of the American people following their bailouts of Wall Street with TARP (Toxic Assets Relief Program) to prevent the forecasted collapse of our economy,” Cain states on his website. “The sweeping legislation posed new restrictions and created new regulations for many sectors of the financial industry- from credit card companies to massive banks to accounting firms.” Cain is in favour of repealing Dodd-Frank.
Newt Gingrich
In a campaign that “stalled as soon as it started”, says the lobbyist, Newt Gingrich has been not only trying to gain support in the private equity community, but, any community.
“Newt is struggling with the business community,” says the lobbyist. “He retooled his message over the summer.” As part of his campaign to seek the Republican nomination, Gingrich has made the repeal of Dodd-Frank a key element of his proposed policy.
Gingrich has said Dodd-Frank is “a devastatingly bad bill” that is “killing small banks, killing small business, killing the housing industry.”
The former Speaker of the US House of Representatives said over the summer: “Dodd-Frank is a regulatory Tower of Babel that is paralysing the American economy and depressing home values. The legislation itself is over 2,300 pages in length and requires federal regulators to come up with more than 400 rules, which will expand the law by another 5,000 pages.”
“Once we repeal Dodd-Frank, we can begin to consider limited, responsible, pro-growth financial regulations passed in a series of steps, with each one understood and passed on its own merits. Dodd-Frank is a recipe for American prosperity to die slowly.”
Jon Huntsman
Former Utah Governor Jon Huntsman agrees that Dodd-Frank should be repealed, but he wouldn’t stop there. He would also eliminate the Sarbanes-Oxley law passed in 2002, which set standards for corporate accountability in the wake of the Enron scandal.
“Huntsman falls in line with the front-runners on Dodd-Frank,” says a New York-based lawyer. “His position on Sarbanes is seen as a little extreme, but asset managers are thrilled with his tone.”
The problem with Huntsman is his service in the Obama administration, says the lawyer. Huntsman served two years as Obama’s ambassador to China. “In one sense it’s a positive that he has that experience. Especially since it’s China,” says the lawyer. “But, Obama is a pro-regulation president. The ties don’t help him.”
Another potential problem for Huntsman is his frank language on carried interest tax hikes. In August, Huntsman said he is in favour of comprehensive tax reform with includes how carry is taxed.
In an interview with CNBC 23 August, Huntsman said he supports “closing loopholes, repealing deductions and ending corporate welfare as part of a comprehensive tax reform plan”.
Huntsman spoke of the quirks in the tax code that allow private equity and hedge fund managers to pay only 15 percent of their income in taxes, rather than the 35 percent they would normally pay. Carried interest qualifies for lower capital gains tax rates of 15 percent (20 percent after 2012).
Rick Santorum
Former Pennsylvania Senator Rick Santorum, who is trailing the pack, is for drastically changing the US tax code.
“Rick Santorum believes we need to reduce taxes on individuals across the board, making the system simpler, flatter, and fairer,” according to Santorum’s campaign site.
Private equity managers should take note that Santorum calls for extending the current capital gains and dividend tax rates, and repatriate taxable income outside the US at a rate of 5 percent to induce job creation.
Speaking to venture capitalists, Santorum says “We must not only encourage innovation, but celebrate it by no longer holding entrepreneurs hostage year-in and year-out through the tax code’s treatment of the research and development of new and promising discoveries – regardless of whether it is the next ground-breaking cancer treatment or a component for a fuel-efficient engine.”
Removing regulatory burdens is also high on his agenda, but not regulation that impacts private equity managers. “Santorum’s message is focused on repealing health reform and repealing environmental regulations,” says the lobbyist. “Santorum doesn’t see much hope campaigning for private equity dollars. He figures Romney and Perry are preferred.”
The candidates are in stark opposition to President Obama’s policies.
Barack Obama
President Barack Obama, who aims to secure a second term in office as the Democratic candidate, has made his intentions clear for the remainder of his first term and the tone for his potential second term.
Obama has celebrated the passage of Dodd-Frank and has stepped up talk of “taxing the rich” as his campaign for reelection heats up.
His 2012 budget directed the US Congress to require executives of private equity firms to pay ordinary income tax rates as high as 35 percent (39.6 percent after 2012) on the profits they receive as compensation. Carried interest currently qualifies for lower capital gains tax rates of 15 percent (20 percent after 2012).
“If you are a wealthy CEO or a hedge fund manager in America right now, your taxes are lower than they have ever been,” said Obama in a televised news conference in June. “They’re lower than they’ve been since the 1950s. And you can afford it. You’ll still be able to ride on your corporate jet; you’re just going to have to pay a little more.”
However, the president has extended an olive branch to the private equity community. In August, during a three-day bus tour of Midwestern cities, Obama cited private equity as a way to stimulate job growth and investment in rural communities.
Obama announced 16 August that the Small Business Association (SBA), in conjunction with the Department of Agriculture, will launch a series of conferences nationwide to provide a platform for connecting private equity and venture capital investors with rural start-ups.
Furthermore, his administration will use “marketing teams” to go out and pitch federal grant money to private investors. These marketing teams will leverage existing personnel with expertise about rural funding sources across all federal departments and agencies. Obama’s announcement came on the second day of his Midwest tour through Minnesota, Iowa, and Illinois. The president was travelling through the heartland to explain his economic policies to rural voters.
In recent weeks, President Obama has declared war on private equity managers, citing carried interest as a way to pass his $447 billion jobs package. “[Carry], coupled with his penchant for financial regulation, makes the next election particularly crucial for the [private equity] industry,” says the lobbyist. “The line in the sand has been drawn.”
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: