Private Capital and the Public Record
Private equity was a popular punching bag for the media and some members of Congress during debate over the Inflation Reduction Act. Their characterization of carried interest as a “loophole” was inaccurate, and the depiction of our industry was even more misleading. These critics should take a trip outside the Beltway to see how private capital is fueling growth by investing in thousands of small businesses and supporting millions of workers and retirees.
Private equity firms partner with their investors – including public pension funds and college endowments – to buy companies and work to improve their performance, creating jobs and long-term value in the process. The returns from these ventures go directly to investors, including more than 34 million schoolteachers, first-responders, and other public servants who depend on pension returns for their retirements.
In 2020, private equity directly employed more than 11 million workers in all 50 states. These workers earn higher salaries than the average American, which provides crucial support as historic inflation is makes it more difficult for families to afford everyday goods.
Over 74% of the more than $1 trillion private equity invested in the U.S. last year went to support 5,205 small businesses. One of those businesses was Sunshine Beverages, a fast-growing energy drink manufacturer aiming to redefine the market with healthier, natural ingredients. Private equity helped this North Carolina-based company grow its distribution network, establish key grocery chain partnerships, and continue to deliver on its promise of great taste, no artificial flavors, and lower sugar.
Blood clots, heart attacks and strokes are responsible for 1 of 4 deaths in the U.S. Fortunately, private equity backed Anthos Therapeutics is conducting late-stage clinical trials on a pioneering new treatment that could save millions of lives. According to CEO John Glasspool, “Without the backing of private equity, this kind of drug at this stage of development would sit on the shelf and wouldn’t be possible.”
Year after year, private equity delivers the strongest returns of any asset class for investors across America – helping fuel public pension funds and strengthen retirements. In 2021, private equity investments delivered a median annualized return of 15 percent over a 10-year period. A recent study published by Cambridge Associates found that over the last decade, “institutions with higher private investment allocations experienced higher returns historically.”
As public markets grow more volatile, private equity serves as an increasingly important tool for diversified pension funds looking for reliable investments. The Great Recession offered the ultimate validation of private equity’s long-term stability. A study by the Kellogg School of Management at Northwestern University found that “companies backed by private equity firms were more resilient in the face of the financial crisis compared to their counterparts.”
Despite our industry’s strong record supporting economic growth and retirement security, private equity remains a favorite target of some politicians and pundits over carried interest. Here is what they get wrong.
Profit sharing/carried interest has been around for hundreds of years to provide service partners an incentive for the sweat equity they put into growing a business. A service partner receives carried interest when a firm sells a business and generates a return for investors. By treating carried interest as a capital gain, the U.S. Tax Code is providing a crucial incentive for private equity to make productive long-term investments in businesses and contribute operational expertise to entrepreneurs. Listen to Shila Nieves Burney, a general partner at Atlanta-based Zane Venture Fund and Zane Access which invests in diverse entrepreneurs and businesses, “I’m not a billionaire on Wall Street. I don’t come from a wealthy background. This is my sweat equity that I’ve put in.”
Raising taxes on these productive private equity investments is bad policy. A recent study from Professor Charles Swenson of the University of Southern California Marshall School of Business found that a proposed 98 percent tax increase on carried interest capital gains would result in millions of lost jobs, billions in lost tax revenue, and would limit returns for U.S. public pension funds. Simply put, when the government takes more money, there is less to invest.
At the 11th hour, Sen. Ron Wyden (D-OR) introduced another extreme provision that would subject thousands of private equity-backed small businesses to a tax increase originally intended to target large corporations.
Fortunately, bipartisan members of the Senate decided against both misguided tax hikes. While many members of the media believe support for the industry is based on fundraising, the reality is that every single member of Congress has private equity in their community – and their constituents benefit from this investment. Private capital supports millions of jobs across America, helps small businesses stay open, and delivers the strongest returns for pensions. Private capital is a force for good in our country and private equity will continue to invest in American businesses.