When it comes to taxes, there’s no doubt where the private equity industry’s self-interest lies. President Barack Obama wants the top rate on long term capital gains to rise next year from 15% to 23.8% (counting the 3.8% surtax on investment earnings in ObamaCare ) and even more importantly, to tax private equity managers' “carried interest” as ordinary income at a rate of 35% now and 39.6% next year. Ah, but there’s more to life than taxes. There’s image, too. In the following guest post, Aaron Schoenherr, a founding partner at Greentarget, a communications firm with finance and law clients, suggests Romney is creating a PR problem for his private equity buddies and one that they need to address now.
Like It Or Not, Everybody In Private Equity Has To Run For President Now
By Aaron Schoenherr, Founding Partner at Greentarget
As private equity continues its love affair with presidential candidate Mitt Romney in the form of campaign contributions, the presidential hopeful is creating a potentially serious public relations problem for the industry. USA Today recently reported that 25 percent of the campaign’s fundraisers hail from the financial community. But if these firms want to preserve their deal flow this year, they will have to find a way to communicate with people like Joe Soptic.
Soptic is the star of a hard-hitting Obama campaign commercial in which he explains what it was like after Bain Capital and other investors shuttered the GST steel mill where he worked. Standing near what appears to be the old, abandoned steel mill, Soptic says that he’s angry with the private equity investors involved. He portrays them as greedy and callous.
This ad, while aimed at Mitt Romney, represents a big problem for the private equity industry. Thanks to attacks made by Newt Gingrich, Rick Perry and now President Obama, private equity is a central feature of the presidential campaign. More often than not, it is portrayed as a negative business whose investors enrich themselves at the expense of others.
To counter this impression, private equity firms have to run parallel campaigns during Romney’s run for president. Firms have to explain what they do clearly and simply, using everyday terms. If the industry rides out this campaign in silence, it risks letting others speak for it, which may be a losing strategy.
Regardless of who wins this November, private equity is already losing the campaign. Romney’s explanations of private equity have failed to impress a skeptical public keenly aware of his wealth. In defending his own record, Romney has at times distanced himself from other private equity players, as he did when he took pains to point out that he was no longer with Bain when GST collapsed.
The industry’s own effort to explain the business has been well-intentioned but less than effective. The Private Equity Growth Capital Council has a website with educational materials, white papers, and a section where people can share positive stories about private equity’s impact. But when the Council released a video in May that showed how a cash infusion from the Carlyle Group helped save AxleTech International of Troy, Michigan, CNBC ran clips from the video alongside a banner that read, “Private Equity Strikes Back!” The issue, for the viewer, was framed as a negative one from the start.
Private equity firms need to turn this around. Damage to the industry’s reputation can have big implications in Washington, potentially affecting tax policy and the interest paid the industry by regulators. But more immediately, a negative perception of private equity will slow fundraising and sink buyouts. Each firm needs to approach this image campaign individually and with the specific goal of reaching stakeholders whose opinions can make or break deals. Stakeholders include employees, who in the age of social media are increasingly active participants in their employers’ decisions. In April, the New York Times reported that employees are uniting to be a “formidable force” on corporate governance issues such as executive pay packages. It gave examples of such activism at Wal-Mart and at Citigroup, where chief Vikram Pandit sent a memo to employees in April urging them to vote in favor of the bank’s pay plans. When it comes to private equity investments, it will be increasingly important to have a dialogue with employees.
The other big stakeholders include institutional investors, who have hundreds of billions of dollars and some 42% of the industry’s total investing capital, by one account. Their sensitivities are high and buy-in crucial. Pension fund boards want to invest with unblemished companies. Heather Slavkin, senior legal and policy advisor for the office of investment at the AFL-CIO, indicated that investors’ opinions are up for grabs. “Hearing terrible stuff about what private equity does will force the trustees to reconsider their allocations,” she told Bloomberg Businessweek.
In addition to employees and investors, firms must communicate with company executives and board members. They, too, are eager to sell only to firms that have stellar and trustworthy reputations, a point made by Blackstone Group President Hamilton E. James in February.
Private equity is used to touting non-correlated returns and other arguments for its investing activities. Firms will find, however, that the conversation has shifted away from profits and toward social responsibility. Stakeholders want basic questions answered, the same ones being raised by political reporters, voters and campaign managers. They want to know, is private equity greedy and bad? Does it value wealth more than jobs? Are there better ways to save and restructure companies? And why should I trust anyone in the world of private equity?
Private equity firms need to be able to supply answers that go beyond defenses of capitalism and free enterprise. To make a deal successful, a company will have to articulate not only the benefits for investors and the company but also for the community and employees.
It’s hard to step into the spotlight after years of avoiding it. It’s even more difficult to craft an effective message when that’s let loose in the middle of a sophisticated presidential campaign.
But if you’re in private equity, you have to engage the Joe Soptics of the world during this race. Firms will have to clearly and accessibly explain their missions and actions at least until November. And most likely this conversation will continue for years to come.
Aaron Schoenherr is a founding partner of Greentarget, an international communications firm specializing in the financial and legal sectors.