“Private Equity at Work” to spotlight PE investments driving growth and creating jobs in communities across the country.

WASHINGTON, DC, Feb. 2, 2012 – Today, the Private Equity Growth Capital Council (PEGCC) launched “Private Equity at Work,” a new initiative aimed at educating media, policy makers and the public about the private equity industry and its positive contributions to the American economy. The campaign is anchored by a new website and resource center, www.PrivateEquityAtWork.com, featuring educational content, industry data and an in-depth look at specific private equity investments that are driving growth and creating jobs.

“There is a real lack of understanding about private equity – what it does, how it works and who benefits from it,” said Steve Judge, president and CEO of the PEGCC. “We wanted to set the record straight by providing credible and up-to-date information about the industry and our proven record of strengthening companies, creating jobs and delivering impressive returns to pensions and other investors that bolster the financial security of millions of average Americans.”

The online resource center contains a wide range of information about private equity, including:

• A series of video and written case studies chronicling specific PE investments;

• An industry primer, entitled Private Equity 101

• Basic industry fact sheets and infographics

• A new blog that will publish industry news, reactions and perspective.

The video case study series will be updated throughout the year. The first two companies profiled in the series are Universal SmartComp, a nationwide physical medicine network solution in the workers’ compensation industry that has added 142 new jobs since being acquired by The Riverside Company in 2007; and Project Service, LLC, a Carlyle Group-funded public-private partnership with the State of Connecticut to renovate and operate 23 service areas along state highways that is expected to create 375 jobs and $500 million in economic benefits to the state.

The next video in the series, expected to be completed next week, will feature Vanguard’s investment in The Detroit Medical Center. Vanguard is owned by The Blackstone Group and their investment is one of the largest private investments in Detroit’s history.

“The PE-backed companies we’ve profiled are just a few examples of the thousands of companies that private equity has had a hand in strengthening,” added Judge. “The headlines have tended to focus on a few unsuccessful investments. This effort focuses on our successes, of which there are many more, and showcases the true value that private equity investment brings to companies, workers, investors and the U.S. economy.”

Private Equity at Work will be supported by an online advertising campaign nationally and in key states. To learn more, visit www.privateequityatwork.com.

About Private Equity

The private equity industry in the U.S. comprises nearly 2,300 investment firms in all 50 states. They operate nearly 14,000 U.S.-based companies that employ approximately 8.1 million people. In 2010 alone, U.S. private equity firms invested nearly $150 billion in over 1,200 companies. Through 2009, the private equity industry worldwide has distributed nearly $1.6 trillion to its limited partner investors.

About the Private Equity Growth Capital Council

The Private Equity Growth Capital Council (PEGCC) is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity and growth capital investment industry and its contributions to the national and global economy.  Established in 2007 and formerly known as the Private Equity Council, the PEGCC is based in Washington, D.C.  The members of the PEGCC are 36 of the world’s leading private equity and growth capital firms united by their commitment to growing and strengthening the businesses in which they invest.  More information about the PEGCC can be found at www.pegcc.org.

By Armand F. Lauzon Jr.

In the past 10 years, I’ve been the CEO of three companies owned by the Carlyle Group, a major private-equity firm. I’ve watched with interest, therefore, as the private-equity industry in which Mitt Romney thrived has been portrayed as dedicated to corporate raiding, to profiting as it destroys. In the companies I’ve run and the private-equity industry I’ve observed, nothing could be further from the truth.

Private-equity firms exist for one reason: To create value for shareholders, the largest percentage of which are public pension funds. Firms do this by finding and investing in underperforming businesses that have potential for growth.

Many of these businesses have something unique and valuable about them but have been victims of poor management, lack of investment, or an inability to adapt to new market conditions. If a business under private-equity management doesn’t grow, there’s little chance of returns for investors and jobs can be put at risk.

The power of the private-equity model is that, unlike in the traditional corporate model, the interests of investors, management and employees are aligned. Managers like me are required to put our own capital into the company. Some call this “skin in the game”—I call it being an owner. And we all know that ownership is a powerful motivator to care and succeed.

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You can watch the full clip here:

Judge: “Our goal is to engage policymakers, the media, and the public in a national dialogue about how private equity and growth capital firms drive economic growth, strengthen and improve businesses, and provide financial security for millions of Americans.”

Washington, D.C., January 30, 2012 – The Private Equity Growth Capital Council (PEGCC) today announced that Steve Judge has been appointed president and chief executive officer.  Judge succeeds Douglas Lowenstein, who stepped down last year. Since August 2011, Judge served as interim president and chief executive officer, prior to that he served as the Council’s vice president for government relations.  The appointment is effective immediately.

Mark B. Tresnowski, chairman of the PEGCC and managing director and general counsel of Madison Dearborn Partners, a PEGCC member firm, said, “After a search and several months of Steve’s leadership, it became clear that Steve’s effective advocacy during a challenging and dynamic time for our industry make him the right person for this important role. With the full support of the PEGCC membership, we are confident that Steve and his team will succeed in their mission.”

Mr. Judge said, “I am extremely proud of what we’ve accomplished in just a few years since the founding of the PEGCC and I look forward to building on that record of success. Our goal is to engage policymakers, the media, and the public in a national dialogue about how private equity and growth capital firms drive economic growth, strengthen and improve businesses, and provide financial security for millions of Americans. The year is already off to an exciting start, and the Council is ready for the challenges to come.”

Judge has a long and distinguished career in Washington. Before joining the Council in March 2007, Judge was Senior Vice President, Government Affairs and Head of the Washington Office for the Securities Industry Association (SIA), now the Securities Industry and Financial Markets Association (SIFMA). Judge also served as a member of several congressional staffs. From 1987 to 1991 he was Deputy Staff Director of the Committee on Banking, Finance and Urban Affairs of the U.S. House of Representatives. Judge came to Washington, D.C. in 1978 with Congressman Bruce Vento (DFL-MN), eventually becoming the Congressman’s Legislative Director. He began his legislative career in the Minnesota State Legislature as Staff Assistant with the Senate Committee on Education. Judge holds a Bachelor of Science degree in government from St. John’s University in Minnesota.

About Private Equity

The private equity industry in the U.S. comprises nearly 2,300 investment firms in all 50 states. They operate nearly 14,000 U.S.-based companies that employ approximately 8.1 million people. In 2010 alone, U.S. private equity firms invested nearly $150 billion in over 1,200 companies. Through 2009, the private equity industry worldwide has distributed nearly $1.6 trillion to its limited partner investors.

About the Private Equity Growth Capital Council

The Private Equity Growth Capital Council (PEGCC) is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity and growth capital investment industry and its contributions to the national and global economy.  Established in 2007 and formerly known as the Private Equity Council, the PEGCC is based in Washington, D.C.  The members of the PEGCC are 36 of the world’s leading private equity and growth capital firms united by their commitment to growing and strengthening the businesses in which they invest.  More information about the PEGCC can be found at www.pegcc.org.

Bronwyn Bailey, Ph.D. is the vice president of research at the Private Equity Growth Capital Council.

A recent Deal Professor column by Steven M. Davidoff attempts to set aside the political rhetoric and take a sober account of the private equity industry based upon “the best available research.” The column focused on a number of academic studies that provide empirical support that private equity-backed companies historically show lower default rates and little difference in employment trends relative to their peer companies. Additional studies support these findings and I agree with these claims.

The column also summarizes several other studies that demonstrate the value created by private equity’s ability to better align the interests of owners and managers – namely, more efficient use of capital and better corporate governance.

Despite all of this research, Mr. Davidoff was unwilling to draw a final conclusion about the industry, saying that “value creation has yet to be established” by empirical research.

Thankfully, there are additional studies on private equity by preeminent academics that I believe fit into the “best available research” rubric, the findings of which should allow Mr. Davidoff and others to draw a definitive conclusion about the industry’s ability to create value at the companies in which it invests.

Please click here for the full article.

By MICHAEL CORKERY

Large public pension plans are pouring more money into private-equity funds, deepening ties between government workers and an industry currently under the harsh glare of U.S. presidential politics.

Big public-employee pensions had about $220 billion invested in private equity in September, or 11% of their assets, according to Wilshire Trust Universe Comparison Service, which tracks the holdings of pensions, foundations and endowments.

That is up about $50 billion from a year earlier, when such investments accounted for 8.6% of large pension funds’ assets. A decade ago, pensions with at least $1 billion under management had just 3% of their money with private equity.

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“Private equity is a vital source of capital, having invested nearly $150 billion in over 1,200 companies in 2010 alone. Raising taxes on this type of investment would discourage the risk-taking required to start, grow, and save companies. Anyone else who purchases a company, and makes a series of improvements over several years that increase the value of that company, would be entitled to capital gains treatment if they sold the company for a profit. That is the private equity business model.  PE firms make long-term investments in companies and if successful the profit share – known as carried interest – is properly treated as capital gains. ”

Additional background information on carried interest:

Capital gains is taxed at a lower rate to incentivize investment, entrepreneurship and risk-taking.

• The lower tax rate on capital gains encourages risk-taking required to start, grow, and save companies.
• The tax rate on capital gains reflects a long-standing principle of U.S. tax code:  those who take risks to invest should be rewarded.

Carried interest is a capital gain.

• Capital gains treatment for carried interest has been enshrined in partnership tax law for over fifty years and is based on the principle that we reward those who take entrepreneurial risk, whether that risk involves investing capital or it involves investing expertise – or in the case of private equity, both.
• Carried interest is not exclusive to private equity, but can be found in a broad range of important industries and economic sectors that utilize a partnership structure. Real estate developers, for example, typically receive carried interest in development projects for new office buildings, shopping malls, and the like. Venture capital firms and small business investment companies receive carried interest when they invest in a new start-up.
• Carried interest is not the same as ordinary income. In the case of private equity partnerships, carried interest is an equity stake in an operating business owned for years, and carries with it the risk that the company will not generate a profit in which case the stake becomes worthless.
• Carried interest profits are subject to a claw back.  Partners have to actually return carried interest income if their investment fund does not achieve the return target set by investors in partnership agreements.  In contrast, no one has to return their salary if they don’t do a good job.
• To raise the tax rate on carried interest would put the U.S. at a competitive disadvantage. The countries with which we compete tax carried interest as a capital gain and at rates ranging from 0% in India, and 10% in China, to 18% in the United Kingdom.

By Nicholas Donato
Private Equity International

Pam Hendrickson receives PEI’s Leadership Award for her work as an industry advocate in Washington DC and for her crucial contributions to Riverside as its chief operating officer.

Pam Hendrickson, chief operating officer of global mid-market firm The Riverside Company, was last week awarded the 2012 Leadership Award by Private Equity International sister title Private Equity Manager.

“I am proud of our industry and especially of what my colleagues at Riverside have accomplished in making a significant impact on the worldwide economy”, said Hendrickson upon receiving her award at the Private Equity International CFOs and COOs Forum in New York.

William Hupp, chief financial officer of Adams Street Partners, was last year’s winner.

Hendrickson went on to say the industry’s most important work still lay ahead, citing recent media scrutiny of the private equity model as cause for greater advocacy on the part of industry professionals

True to her word, Hendrickson plays an active role with industry trade bodies, including sitting on the board of the Private Equity Growth Capital Counsel’s (PEGCC) growth capital committee

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A January 23, 2012 column authored by William Cohan (“Private Equity’s Public Subsidy Is a Tragedy”) grossly exaggerates the impact of interest deductibility on corporate debt in private equity transactions.  This document provides readers with basic facts about private equity’s use of debt that counter the various assertions the author makes in his column.

Assertion: “American taxpayers subsidize the private-equity industry.” 

Fact: The vast majority of American corporations finance a portion of their operations with debt. The debt of private equity-backed companies is treated no differently than the debt of any public or private company. Surely Mr. Cohan does not believe that the American taxpayer is subsidizing every U.S. company.

Assertion:  “Corporate debt is the mother’s milk of a leveraged buyout, there would be no private-equity/LBO industry without this huge tax benefit.” 

Fact: The average equity contribution in a private equity transaction has increased from 10% in the 1980s to nearly 40% today. That means that the private equity firm puts up $1 in equity for every $1.50 they borrow from the bank. This debt/equity ratio is on par with many public companies and is, in fact, far lower than the leverage ratios employed at investment banks, which are typically levered 10:1 or higher.  

Assertion:  By loading up a company with debt and then deducting the resulting interest expense, tax payments are generally wiped out…Given that tax revenue is necessary for the government to function, this means the rest of us provide a subsidy that allows the private-equity firms to thrive. 

Fact:  Mr. Cohan omits an important part of this equation. For every dollar of interest expense paid by a company, there is a corresponding dollar of interest income recorded by the holder(s) of the debt. Under the tax code, the debt holders are required to pay ordinary income tax rates on this income, thereby supplying the Treasury with the tax revenue that it needs to function.

Assertion: [T]he magic of the entire industry depends almost solely on the interest-expense provision in the tax code.

Fact: There is a “magic” to private equity but it has nothing to do with interest deductibility. It has everything to do with aligning the interests of owners, investors and management so that everyone can focus on a single objective: improving the company to make it a more valuable enterprise. Today, private equity firms bring operational and managerial expertise to the companies in which they invest. They make strategic investments in R&D spending, product development, operational capacity and sales and marketing.

One final point: Mr. Cohan acknowledges that “undoubtedly many companies that might have failed have been turned around” as a result of private equity investment. This is the most (and perhaps only) accurate part of his story, and it leads one to an inevitable conclusion. Every company that is saved, expanded or improved by private equity has something in common – its profits almost always increase. This means one thing for the government: more tax revenue.