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Robert Greenwald’s “War on Truth”
Robert Greenwald’s “War on Greed” would be better titled “War on Truth.” The eight-minute video is built on sweeping mischaracterizations and blatant inaccuracies about the private equity industry and the nature of private equity investment. The following represents the Private Equity Council’s effort to correct the record.
War on Truth Allegation #1: “Private equity firms take over public companies using primarily borrowed money. To pay off the debt, they then sell the assets of the companies, fire thousands of workers and radically cut the benefits of remaining employees.”
FACT:
Private Equity is a business model based on finding undervalued or underperforming companies, buying those companies, building their value over time and then selling the company for a profit. Independent research shows that PE firms make significant investments in and add value to the companies they acquire:
• In more than 80 percent of the U.S. private equity (PE) deals included in a recent independent study by Ernst & Young, employment levels at the time of the PE exit were the same or higher than before the PE firm acquired the company.
• PE firms generally buy and hold companies for six years, according to Thomson Financial, and often maintain an equity stake in portfolio companies once they’ve been taken public.
• According to the E&Y study, the average value of businesses in the U.S. acquired by PE firms grew 83 percent over the course of PE ownership.
• The annual rate of growth achieved by the largest private equity-owned businesses outperformed equivalent public companies (in the same country, industry sector, and timeframe), according to E&Y. Average annual growth rates were 33 percent compared to public company equivalents of 11 percent.
War on Truth Allegation #2: “Private equity firms make sweetheart deals with the banks to finance these takeovers and then “pump and dump” the companies they control, often resulting in lost jobs for workers, the destruction of communities that rely on the companies and extreme profiteering for the private equity firm.”
FACT:
Private equity investment is exactly that – investment in companies, workers and communities:
• Private equity firms make long-term investments in companies to help them grow their businesses by increasing R&D spending, developing new products and business strategies, hiring superior management, and increasing capital spending.
• According to the E&Y study, two-thirds of the growth in earnings experienced by companies acquired by PE firms “came from business expansion, with organic revenue growth being the most significant element. This included the benefits of investment in sales and marketing and new product launches.”
• A 2006 study by Professor Josh Lerner of Harvard University of 496 companies owned by private equity firms for at least a year found that they were stronger and more profitable after returning to public ownership than peer group public companies that had not been owned by private equity firms.
• Across the sample of the Lerner study, private equity-acquired companies’ earnings grew by $6.1 billion: a global average annual growth rate of 15 percent. This growth rate is 17 percent higher than that for equivalent public companies.
There are no “sweetheart deals” with banks. The real “good deal” is for pension funds, universities and charitable foundations:
• Generally 80 percent of the profits from private equity investments are distributed to the private equity firms’ limited partner investors, the single largest group of which comprises public and private pension funds, university endowments and charitable foundations. In the last 15 years, private equity firms worldwide have distributed more than $430 billion in profits to these investors, who use their superior returns to carry out important social missions.
• In 2006 alone, the top 20 public pension funds for which data is available, representing 10.5 million teachers, police officers, firefighters and other public service retirees in California, New York, Texas, Florida, New Jersey, Ohio, Pennsylvania, Michigan and other states, had collective private equity investments totaling $111 billion.
• A corollary benefit from these exceptional returns is that dozens of states avoided budget cuts or tax increases that would have been required to meet their legally‐mandated pension obligations to retirees who have devoted their careers to public service.
War on Truth Allegation #3: “The money private equity firms borrow to take over companies is deducted from the taxes they otherwise pay. The borrowed tax free money is not used for new jobs or new factories or new products.”
FACT:
Interest expense deductions are available to virtually all business and individual taxpayers.
• Every business in America, small, large, public, private, is entitled to deduct from its taxable income the interest expense its pays on the money it borrows to finance its operations. PE firms are no different. Indeed, American homeowners can deduct the interest payments on their home mortgages from their taxes, in essentially the same way that businesses do. The logical conclusion from this misguided missile would be that the filmmakers and their allies also favor the elimination of mortgage interest deductions for American homeowners.
War on Truth Allegation #4: “On most of their money, private equity managers pay half the tax rate that firemen, teachers and policemen pay.”
FACT:
Private Equity partners are taxed in exactly the same manner and at exactly the same rate as anyone else.
• Private equity partners pay millions of dollars in income taxes every year. They typically pay ordinary income tax rates of 35 percent on their salaries, their bonuses and the fees they receive. And like all other investors, they pay capital gains rates on the profits they receive from the sale of capital assets that they have owned for at least one year and sold for more than they paid for them. The same capital gains tax treatment applies to investors who buy and sell securities, homes, companies and other capital assets, whether the investor is Bill Gates, Warren Buffett or the owner of mutual funds.
• According to the Tax Policy Center (a joint project of the Urban Institute and the Brookings Institution), the average American’s effective federal income tax rate in 2004 (the latest year for which data is available) was 7.9 percent. The effective federal income tax rate for the top 10 percent of taxpayers (including PE firm partners) was 20.5 percent. While this criticism has a populist ring, it is, like so much else in the film, is truth-challenged.