The Private Equity Council study concludes that the rate increase could reduce the overall value of the nation’s commercial real estate assets and in turn contribute to an increase in commercial mortgage default rates.

“This data is consistent over two decades and confirms that tax increases reduce private equity investment activity and that the proposed 157 percent tax increase on investment partnerships would have a harmful effect on the economy, the recovery, and job creation,” said PEC President Douglas Lowenstein. “We have said throughout this debate that private equity will continue, but this will have an adverse economic impact.”

The PEC study analyzed reported equity invested in U.S. businesses by all types of private equity partnerships — venture capital, buyout and growth capital – between 1980 and 2009, using data provided by ThomsonReuters. During the past 30 years, annual invested equity rose from $723 million in 1980 to $49 billion in 2009. The record year for investing was 2000, when $137 billion was invested in more than 7,000 businesses.

Sizeable changes to the effective tax rate on private equity investment have been enacted on three occasions in the past thirty years: 1986, 1997, and 2003. In each of these cases, an increase in the effective tax rate reduced the growth of private equity investment and a cut in the tax rate stimulated investment, as measured in the four years before and after the rate change.

To isolate the marginal effect of tax rates on equity investment, the study excluded the effects of credit markets, the health of the overall economy and other policy changes on the investment data.

The study adopted a conservative approach to measure the investment impact of the proposed tax increase, using two separate methodologies. The first methodology measures the impact of the tax increase on total dollars invested. Using this approach, a one percentage point increase in the effective tax rate on private equity investment is associated with a $1.8 billion decline in annual private equity investment, holding all other factors constant.

Thus, the pending 14.7 percentage point increase in the tax rate – from 23.8 percent (in 2013) to 38.5 percent as proposed by the House – would result in an annual decline of $27 billion in private equity investment.

The second methodology calculates that every percentage point increase in the marginal tax rate would result in a 1.07 percent annual decline in private equity investment, holding all other factors constant. Based on 2009 investment – when investment was relatively low – that would result in an annual investment reduction of $7.7 billion.

Estimating employment effects is challenging but it is an inescapable economic fact that reduced investment depresses job creation over time. Applying the same method used by the Obama Administration to forecast the effect of the stimulus spending package on the economy, the PEC study estimates that employment could be 37,000 to 128,000 lower than it would be if the carried interest tax rates were to remain unchanged.

Read the complete study

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; the Blackstone Group; the Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).
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“At this time of great market uncertainly, now is not the time to upend more than 50 years of partnership tax law characterizing carried interest as a capital gain.

“This punitive, 157 percent tax hike on growth investment by real estate, venture, private equity and other firms will hurt those companies that are most desperately in need of capital to sustain or create jobs and drive growth.”

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).

The report, the first to quantify the scope and scale of private equity employment in the United States, also found that private equity investment firms channeled more than $1 trillion in new capital into nearly 9,500 U.S. companies during the past 10 years. That amounts to investments of about $120 million per company. More than 2,500 of the private equity-backed businesses in the U.S. – or 30 percent – are manufacturers. Together, they employ at least 1.3 million workers.

The six million jobs total is based on actual employment reports from 3,650 – or 39 percent – of the 9,473 private equity-backed companies headquartered in the United States. Using data sampling and analysis techniques similar to those employed by the U.S. Bureau of Labor Statistics to estimate U.S. employment and payroll, the PEC estimates that the actual number of employees at all U.S. private equity-backed companies – including the companies that did not report employment data – is approximately 10.9 million.

All fifty states benefit from private equity investment. California, the nation’s most populous state, is home to 1,205 private equity backed companies that together employ more than 440,000 people in facilities in California and elsewhere across the country. Even Wyoming, with a population of 540,000, is the headquarters of ten small private equity-backed companies that together employ 180 people in all their facilities.

In releasing the new data, the Private Equity Council launched a new feature on its web site. “Private Equity: State by State.” The interactive map of the United States enables visitors to view state-specific data about the private equity industry by scrolling their cursor over each state. The data includes information about private equity employment, investment and state-based private equity firms and companies.

Explore the Map: Private Equity State by State

“This groundbreaking analysis shows that private equity firms – and the companies in which they invest – are critically important to the American economy,” said Private Equity Council President Douglas Lowenstein. “The $1 trillion that private equity firms have invested in American companies in the past 10 years has provided important and direct benefits for millions of Americans.”

Private Equity Council Chairman Mark Tresnowski, general counsel and managing director of Chicago-based Madison Dearborn Partners, said: “What is especially striking about the report, going beyond the numbers, is the diversity of private equity sponsors. There literally are hundreds of private equity firms in the U.S. — small, mid-sized, and large — that make investments in an equally diverse range of companies. The common denominator is private equity’s singular focus on growing and strengthening companies.”

Below are the states that are home to the largest number of private equity-backed companies; the total employment generated by those companies in the state and elsewhere (based on actual employment reports); and the total private equity capital invested in those companies:

• California – 1,205 companies with 439,000 employees; $126 billion invested

• Texas – 960 companies with 553,000 employees; $181 billion invested

• New York – 661 companies with 568,000 employees; $83 billion invested

• Florida – 507 companies with 371,000 employees; $39 billion invested

• Illinois – 477 companies with 353,000 employees; $73 billion invested

• Pennsylvania – 414 companies with 486,000 employees; $55 billion invested

• Ohio – 374 companies with 326,000 employees; $40 billion invested

• Georgia – 347 companies with 175,000 employees; $26 billion invested

• New Jersey – 336 companies with 247,000 employees; $61 billion invested

• Massachusetts – 309 companies with 119,000 employees; $32 billion invested

Smaller states and jurisdictions also benefit from private equity employment. The District of Columbia is home to 29 private equity-backed companies that employ 4,500 workers at facilities in D.C. and elsewhere. In Utah, 97 private equity-backed companies have 24,000 workers on the payroll. In Oklahoma, 96 companies employ 25,000 workers. And in Arkansas, 30 companies based in the state employ a total of 27,000 workers.

The PEC analysis is based on employment and investment data provided by PitchBook, an independent research firm based in Seattle, Washington, that is focused exclusively on the private equity industry. The PitchBook information was supplemented by private company employment data from Hoover’s, Inc. and by proprietary data collected by the Private Equity Council.

To derive the national employment total of 10.9 million, the PEC analyzed employment data reported to PitchBook and Hoover’s by private equity-backed companies based in individual states. The percentage of private equity-backed companies reporting employment data in each state generally ranged from 30 to 50 percent of all PE-backed companies based in the state. In forty-five states and the District of Columbia, the sample size was greater than 25 percent. In 35 states and the District, the sample size was greater than 35 percent. No sampling techniques were used to calculate individual state employment totals, which were based directly on the employment data reported by participating companies.

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; the Blackstone Group; the Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).

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The study found that the annualized default rate for the more than 3,200 private equity-backed companies acquired between 2000 and 2009 and held through 2008-2009 was 2.8 percent during the two-year recession. That compares to a 6.2 percent annualized default rate for similarly-financed businesses.

“This study is an important contribution to an informed discussion about private equity ownership,” said PEC President Douglas Lowenstein. “The low default rate is another indicator that undercuts popular myths about private equity ownership and suggests that private equity firms are effective at steering companies through troubled times.”

The PEC’s findings are consistent with a variety of independent research studies conducted in the past few years, including a 2008 report by the Bank for International Settlements (BIS) and a 2009 study by Steven N. Kaplan of the University of Chicago and Per Strömberg of the Stockholm School of Economics.

The BIS study found that private equity-backed companies had annualized default rates of 2.13 percent from 1982 to 1986; 3.14 percent from 1987 to 1991; 2.63 percent from 1992 to 1996, and 3.84 from 1997-2001. Kaplan and Strömberg reported a rate of 1.2 percent over the 32 years from 1970 to 2002. The PEC study is the first to analyze data from the 2008-2009 recession.

The PEC findings are at odds with forecasts made by credit rating agencies Moody’s and Standard and Poor’s and by the Boston Consulting Group that the default rate for private equity-backed companies would rise significantly during the recession.

Moody’s, S&P and BCG

Moody’s and S&P both have produced research documents suggesting that private equity-backed company default rates are higher than supported by the data analyzed by the PEC. The Boston Consulting Group in 2008 predicted that nearly 50 percent of the world’s private equity-backed companies would default in three years.

The PEC study notes that the Moody’s analysis expanded the definition of “default” to capture voluntary transactions to deleverage companies. S&P broadened its definition of private equity-related transactions to include a defaulted business that has had any dealing with a “private equity” firm, however minor, or however long ago, and includes holding companies in its definition of “private equity” firm.

In addition, the Boston Consulting Group (BCG), in an oft-cited study, used credit spreads at the height of the financial crisis to predict that nearly half of the world’s private equity-backed companies would default within three years.

Findings

The main findings of the PEC study are:

• During the “Great Recession” of 2008-2009 private equity-backed businesses defaulted at less than one-half the rate of comparable companies: 2.84 percent versus 6.17 percent.

• A large number of the transactions that ultimately defaulted involved little to no leverage. Some defaulted investments represented “all equity” investments into risky companies, some of which were acquired out of a previous bankruptcy.

• The defaults tended to correlate to overall economic activity. For example, companies overrepresented in the default group were media companies struggling with declining ad revenue and new competition and auto parts suppliers devastated by the decline in U.S. automotive sales.

• It is highly unlikely that the cumulative default rate of private equity acquisitions will approach anything close to the highs feared by critics.

The PEC study is available in PDF format on the PEC web site at www.privateequitycouncil.org.

Data and Methodology

The PEC report relies on a data set of more than 3,200 U.S. companies acquired by private equity investors in a buyout or similar transaction between 2000 and 2009 and held through the 2008-2009 recession. The data set excludes investments that were “substantially” exited thus reducing the influence of the private equity investors.

The methodology defines “default” as a missed payment or bankruptcy filing—the same definition used by the International Swaps and Derivatives Association (ISDA) to determine whether a default has occurred for the purpose of a credit default swap (CDS) contract. To determine which of the companies covered in the study defaulted, the paper relies on data provided by Thomson Reuters and Dow Jones, supplemented with additional defaulted companies identified through PitchBook and the Private Equity Council’s proprietary data.

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).

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“Raising taxes on growth investments by private equity, real estate and many other partnerships just doesn’t make sense — particularly in this time of fragile economic recovery and continuing joblessness. By more than doubling the tax rate, the carried interest proposal will discourage investment; deprive many American businesses of the capital they need to survive and grow; and jeopardize critical job creation opportunities.

“The bill also would impose a significant new tax burden on investment partnerships that wish to offer shares to the public — a provision that would discriminate among and between firms and further reduce important investments.

“Carried interest is appropriately taxed as a long-term capital gain because it represents the profit that an investment partnership earns by buying a capital asset — in the case of private equity, a company — increasing its value over time and eventually selling it for more than the purchase price.

“Congress established a lower capital gains tax rate to encourage long-term investments that grow the economy. In the case of private equity, that’s just what has happened. In the past six years, private equity partnerships in the United States invested more than $240 billion in equity in American businesses. Congress should not put future investments at risk by raising taxes now.”

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).

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“The revised FDIC guidelines represent an improvement over those originally proposed in July. But we continue to question the need to impose more onerous capital requirements on private equity firms that invest on behalf of retired police officers, firefighters, teachers, and other public employees.

“At a time when the nation’s banks are struggling to raise capital, it is counterproductive to impose measures that could deter investors who are ready, willing and able to provide that capital. Higher capital thresholds could make it less likely that private equity investors will bid on failed banks. At a minimum, it will reduce the value of any bids, increasing the resolution costs for the FDIC and creating greater likelihood that the agency will be forced to tap the $500 billion line of credit put up by American taxpayers. Given the well-documented track record of private equity firms in turning around troubled companies, it also makes little sense to deprive the banking system of needed expertise.

“That said, we appreciate the fact that the FDIC will review this guidance in six months. We hope that this review will yield a long-term policy that will equally benefit the customers and communities of failed banks, the FDIC, private investors, and the United States’ taxpayers.”

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).

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Appearing on behalf of the PEC, Mark Tresnowski, managing director and general counsel of Chicago-based Madison Dearborn Partners, said that although the private equity industry does not cause systemic risk, “we are mindful that excluding any asset class from the new regulatory regime could contribute in some way to diminished confidence in the effectiveness of the new regulatory regime and therefore we support the casting of a wide net.”

Tresnowski noted that the Obama Administration articulated three fundamental factors that trigger systemic risk concerns: 1) The impact that a firm’s failure would have on the financial system and economy; 2) The firm’s combination of size, leverage (including off-balance sheet exposures) and degree of reliance on short-term funding; and 3) The firm’s criticality as a source of credit for households, businesses, and state and local governments and as a source of liquidity for the financial system.

“Private equity contains none of these systemic risk factors and thus should pose little concern for policymakers seeking to develop a new regime to guard against catastrophic, cascading financial shocks,” he told the Subcommittee.

Tresnowski identified a series of reasons why private equity is not a cause of systemic risk: private equity funds themselves have little leverage; private equity firms are not deeply interconnected with other financial market participants; they rely on long term, not short term funding; they are not a source of household credit; and the borrowings of their portfolio companies represent a small fraction of the overall credit market.

While supporting registration generally, Tresnowski said it is not a trivial matter and would impose “considerable administrative and financial burdens associated with record keeping and audits as registered investment advisors” especially for smaller firms. Accordingly, he cautioned that any new reporting requirements for investment firms and other financial institutions should be carefully calibrated “so the burdens are tailored to the nature and size of the individual firm and the actual nature and degree of systemic risk it may pose.”

Private Equity Council President Douglas Lowenstein is scheduled to present similar testimony before the House Financial Services Committee at a hearing on July 17. Both committees are considering proposals to dramatically recast the way that the federal government regulates financial market players, including large publicly-traded bank corporations and private pools of capital.

Among the proposals advanced by the Obama Administration is one that would require private investment firms to register as investment advisers with the SEC, triggering a range of disclosure and reporting requirements about the size and nature of their holdings and investments.

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).

The statement should be attributed to Douglas Lowenstein, President of the Private Equity Council.

“Private investment is an important source of capital for the banking system at a time of distress, and can reduce costs to the FDIC’s insurance fund.

“We believe that the FDIC’s proposed guidance would deter future private investments in banks that need fresh capital.

“We hope that the comment period yields changes that facilitate the flow of private capital into the banking system, consistent with the Administration’s other efforts to address the financial crisis.”

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).

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“The goals of financial regulatory reform should be to restore confidence in financial markets generally and the credit markets in particular, and to protect our financial system from the kind of meltdown that has devastated the global economy. We believe that the Obama Administration has crafted a plan that can accomplish these objectives.

“The plan calls for private equity firms to register as investment advisers with the Securities and Exchange Commission. We support this proposal, even though it will result in new regulatory oversight for many private equity firms.

“While we and most experts agree that private equity firms do not create systemic risk, we also support the concept of data collection from market participants and we look forward to reviewing more detailed proposals as the legislative process unfolds.”

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake; and TPG Capital (formerly Texas Pacific Group).

“We commend the Obama Administration for putting forward a plan to comprehensively address systemic risk in the financial system and reduce the likelihood of a future financial crisis.

“As part of the effort to reduce systemic risk, the proposal unveiled today by Treasury Secretary Geithner for the first time would impose potentially significant regulation on the private equity industry.

“We believe that private equity investments do not create systemic risk. Private equity firms invest in companies, not exotic securities and their investors are long-term investors, eliminating the ‘run on the bank’ type of risk that helped create the current financial crisis.

“We look forward to working with Congress and the Administration to ensure that any legislation that is enacted will give the government the tools it needs to protect the American economy and taxpayers without imposing undue burdens on private equity firms seeking to make investments that create jobs and make companies more competitive.”

About the Private Equity Council

The Private Equity Council, based in Washington, DC, is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity industry and its contributions to the national and global economy. PEC members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; The Blackstone Group; The Carlyle Group; Hellman and Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake, THL Partners; and TPG Capital (formerly Texas Pacific Group).