A high-powered corner of Wall Street is punching back after one of its own — Republican presidential hopeful Mitt Romney — directed a harsh spotlight on how the industry makes its cash.
The private equity business, which Romney has to thank for much of his roughly US$200 million fortune, prides itself on making bad companies better and more valuable, but under the microscope of a White House race, the multibillion-dollar sector has been cast as predatory, as sucking the lifeblood out of companies and killing jobs, while raking in vast profits.
Even supporters of Romney’s Republican rival Newt Gingrich released a lengthy video characterizing private equity groups as turning the “American Dream into nightmares.”
“Their greed was only matched by their willingness to do anything to make millions in profits. Nothing was spared, nothing mattered but greed,” it said, particularly attacking Romney’s former firm, Bain Capital.
Critics have also claimed that venture capitalists pay just 15 percent in taxes on investment income, much less than most Americans pay on their wages.
The pall being cast has clearly disturbed the industry, which is battling back with a new Web site.
“Private equity firms build companies, not tear them down,” the site created by an industry lobby group says.
The page also boasts of the industry investing nearly US$140 billion in US companies last year and channeling capital from pension funds to provide “financial security for millions of Americans.”
Tony James, president and chief executive of Blackstone, one of the most prominent private equity firms, recently told a conference exactly how he and his colleagues were feeling.
“It is distressing to all of us here ... to witness the vicious, politically motivated attacks on the private equity business that are both inaccurate and unfair,” James said.
The business clearly faces an uphill battle to polish its image.
Already in the 1980s, when they were known as leveraged buyout firms, private equity firms were accused of loading up companies with debt, stripping out cash for themselves and leaving the companies to founder.
The attacks have put “private equity and hedge funds back in the public spotlight,” Morningstar analyst Greggory Warren said.
Romney’s admission of his very low tax rate has hurt further.
Blackstone’s James argued that private equity horror stories are rare exceptions that “provide anecdotal fodder for political attack ads.”
“Private equity provides critical capital for startups, growing companies and struggling businesses on a scale that cannot be replicated elsewhere, especially in times of turmoil,” he said.
David Robinson, a finance professor at Duke University, said he thinks the attacks will eventually vanish “because they don’t have much merit.”
“There is no evidence that private equity kills jobs,” he said. “It’s pretty much job-neutral.”
The industry though is more tested to defend the low tax rate for those who own private equity companies — the 15 percent rate for “carried interest,” essentially their share of investment returns.
“That is hardly the same as ordinary income,” the Private Equity at Work Web site says. “[It comes from] an established policy that is designed to encourage growth.”