It's Private Equity's World. That's A Big Deal

Private equity managers won the financial crisis. A decade since the world economy almost came apart, big banks are more heavily regulated and scrutinized. Hedge funds, which live on the volatility central banks have worked so hard to quash, have mostly lost their flair. But the firms once known as leveraged buyout shops are thriving. Almost everything that’s happened since 2008 has tilted in their favor. Low interest rates to finance deals? Check. A friendly political climate? Check. A long line of clients? Check. The PE industry, which runs funds that can invest outside public markets, has trillions of dollars in assets under management. In a world where bonds are paying next to nothing—and some have negative yields—many big investors are desperate for the higher returns PE managers seem to be able to squeeze from the markets. The business has made billionaires out of many of its founders. Funds have snapped up businesses from pet stores to doctors’ practices to newspapers. PE firms may also be deep into real estate, loans to businesses, and startup investments—but the heart of their craft is using debt to acquire companies and sell them later. In the best cases, PE managers can nurture failing or underperforming companies and set them up for faster growth, creating outsize returns for investors that include pension funds and universities. But having once operated on the comfortable margins of Wall Street, private equity is now facing tougher questions from politicians, regulators, and activists. One of PE’s superpowers is that it’s hard for outsiders to see and understand the industry, so we set out to shed light on some of the ways it’s changing finance and the economy itself.

- Jason Kelly

Private Equity Throws Its Weight Around in Washington

As Republicans set out to overhaul the federal tax code in 2017, private equity began leveraging its influence. The industry was out to protect a wildly lucrative tax break that’s helped mint more billionaires than almost any other kind of business. And it succeeded: The idea of closing the loophole simply went away.

The tax break on “carried interest” allows PE managers to pay a lower rate on much of their income. They get paid in two ways: an annual management fee and a share of investment profits. While the fee is taxed as ordinary income, the profit share is treated like a capital gain, which can be taxed less. Critics say this doesn’t make sense, because the profit share is really just another fee paid by clients. The upshot is that superwealthy private equity managers could pay lower tax rates than their secretaries.

Ominously for PE managers, Donald Trump had vowed on the campaign trail to scrap the loophole. But soon, Kohlberg Kravis Roberts & Co.’s Ken Mehlman, a former head of the Republican National Committee who’s now the buyout firm’s global head of public affairs, was helping to persuade lawmakers on Capitol Hill to fight for PE’s cause. After an effort spearheaded by Mehlman, 22 House Republicans signed a letter to the Ways and Means Committee saying the tax break “bolsters long-term investment in American companies.”