Private Equity Industry Having a Hard Time Defending Itself

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It's rare to catch a private equity industry lobbyist off-guard. I've met with these guys, and they come bearing massive, Trapper Keeper–sized folders stuffed with charts, bullet points, and news clippings, all touting the merits of the buyout business and its job-creating goodness.

So it's weird that, when a Republican congressman asked a group of private equity lobbyists and industry executives a very basic question about one of the more problematic political elements of their business — namely, the favorable tax treatment given to private equity and hedge fund managers, who are allowed to treat the bulk of their fees as capital gains rather than ordinary income — the question proved to be a stumper.

According to the WSJ:

The meeting was led by Ken Spain, a vice president at the industry association who once worked for the House Republicans' campaign arm where he helped elect Mr. Gowdy, among others.

Mr. Gowdy focused on the primary political problem facing the industry. "When someone stands up at a town hall and asks why private-equity managers are paying a lower tax than them, what do I say?" he asked.

The private-equity executives didn't have a succinct response.

It could be that private equity professionals have a hard time defending the carried-interest loophole because, as industry heavyweights like CalPERS CIO Joe Dear and venture capitalist Marc Andreessen have said, it's basically indefensible. (Essentially, if you want to avoid admitting that it's a gift given through the tax code to wealthy buy-side managers that politicians are afraid to rescind for fear of losing campaign contributions, you have to mumble some stuff about incentivizing investment and putting personal capital at risk and then change the subject quickly.)

But maybe they just got tongue-tied. I e-mailed Ken Spain, the private equity lobby vice-president who ran the ill-fated meeting and asked him if, given a mulligan, he could provide a succinct answer to the carried-interest question. He e-mailed back:

"The message that was relayed to the congressman is the same easy answer that continues to resonate with policymakers on Capitol Hill — dramatically increasing taxes on capital investment such as private equity, venture capital, and real estate, is not going to turn the economy around."

There we go! Much better!