Bloomberg Businessweek - USA (2019-10-07)

◼ FINANCE Bloomberg Businessweek October 7, 2019

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ILLUSTRATION

BY

IGOR

BASTIDAS

●PrivateEquityThrowsIts

WeightAroundinWashington

AsRepublicanssetouttooverhaulthefederaltax

codein2017,privateequitybeganleveragingits

influence.Theindustrywasouttoprotecta wildly

lucrativetaxbreakthat’shelpedmintmorebillion-

airesthanalmostanyotherkindofbusiness.And

it succeeded:Theideaofclosingtheloopholesim-

plywentaway.

Thetaxbreakon“carriedinterest”allowsPEman-

agerstopaya lowerrateonmuchoftheirincome.

Theygetpaidintwoways:anannualmanagement

feeanda shareofinvestmentprofits.Whilethefeeis

taxedasordinaryincome,theprofitshareis treated

likea capitalgain,whichcanbetaxedless.Critics

saythisdoesn’tmakesense,becausetheprofitshare

is reallyjustanotherfeepaidbyclients.Theupshot

is thatsuperwealthyprivateequitymanagerscould

paylowertaxratesthantheirsecretaries.

OminouslyforPEmanagers,DonaldTrump

hadvowedonthecampaigntrailtoscraptheloop-

hole.Butsoon,KohlbergKravisRoberts& Co.’sKen

Mehlman,a formerheadoftheRepublicanNational

Committeewho’snowthebuyoutfirm’sglobalhead

ofpublicaffairs,washelpingtopersuadelawmakers

onCapitolHilltofightforPE’scause.Afteraneffort

spearheadedbyMehlman, 22 HouseRepublicans

signeda lettertotheWaysandMeansCommittee

sayingthetaxbreak“bolsterslong-terminvestment

inAmericancompanies.”

QuietlymeetingwithTreasurySecretarySteven

MnuchinandtopeconomicadviserswasBlackstone

GroupInc.’sJonathanGray,who’dlaterbecomethe

firm’sNo.2. AndBlackstoneheadStephenSchwarzman

wasenjoyingrareaccesstoPresidentTrump,his

PalmBeach,Fla.,neighborandregulardinnerdateat

Mar-a-Lago.Schwarzman,worth$17.6billion,is one

ofTrump’smostgenerousdonors.He’salsotraveled

toChinarepeatedlyonbehalfoftheadministration.

Congressultimatelydecidedtoputa limitonthe

taxbreak—moneymanagerswouldhavetoholdtheir

positionsforthreeyearstogetit.Butthisbarely

puta dentinPE’sbusinessmodel,whichtypically

involvesinvestingincompaniesforyears.Thevery

daytheSenatepassedthelaw,Schwarzmanhosted

a $100,000-a-platefundraiserforthepresidentat

hisManhattanapartment.

Overthepastdecade,privateequityandinvest-

mentfirms—notincludinghedgefunds—havedropped

about$400million into federal campaign coffers,

according to the Center for Responsive Politics.

That’s more than commercial banks or the insurance

industry.“Theyhavemanagedtohaveinfluence

withbothparties,”JohnCoffeeJr., a law professor

at Columbia University, says of PE.

Leading private equity’s charge in Washington

is the prosaically named American Investment

Council. Formerly called the Private Equity Growth

Capital Council, the lobbying group—like the cor-

poratetakeovergameitself—hasdeftlyrebranded.

TheAICregularlyplacesopinionpiecesinnews-

papers across the country to burnish private equi-

ty’s reputation. “We’re working strategically to

ensure decision-makers in Washington know how

private equity benefits their local communities,” says

Chief Executive Officer Drew Maloney. “And during

this presidential primary process, we’re sending a

clear message to candidates that they are visiting

towns where private equity supports local jobs and

strengthens pensions for public-sector workers.”

KKR’s Mehlman—who in 2017 was chairman of the

AIC—isn’t the only one to toggle between politics and

PE. Tim Geithner, Treasury secretary under Barack

Obama, is now president of the buyout shop Warburg

Pincus LLC. Jack Lew, who took Geithner’s spot,

eventually went to the firm Lindsay Goldberg & Co.

Stacey Dion, head of government affairs at the Carlyle

Group LP, previously worked as a policy adviser for

former House Speaker Paul Ryan. Eli Miller, a man-

aging director for Blackstone’s government relations

group, used to be Mnuchin’s chief of staff.

PE has more wars to fight in Washington, fore-

most among them ensuring that federal regulators

keep their hands off. In terms of assets, Blackstone,