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Carry favour

Next year, one of these Republicans hopes to replace Barack Obama as US President. With financial regulation and taxation high on the political agenda, who would be the best bet for the private equity industry?

The US presidential election may still be a year away, but competition is already hotting up between the Republican candidates vying for the right to take on Barack Obama. And the stakes for private equity are high. The President doesn’t seem entirely hostile to the industry; he recently announced a series of conferences to connect venture capital investors with rural start-ups, for example. But some of the regulatory and tax changes he has championed – notably the regulation-heavy Dodd-Frank Act and the proposal to tax carried interest as income rather than capital gains – have not been very PE-friendly. Do any of his potential Republican opponents offer a more appealing alternative?


About: Former Massachusetts Governor Mitt Romney, the current front-runner, might seem like the private equity industry’s perfect candidate, having spent 14 years leading Bain Capital (albeit a long time ago). But Romney will be eager not to seem in thrall to his former industry, particularly since his opponents are starting to use his background as a point of attack. There’s also a risk that anyone running against him will position themselves as an ‘anti-private equity’ candidate.

Policies: Romney has promised to repeal Dodd-Frank if he becomes President, describing it as ‘extraordinarily burdensome’ regulation. He has also long opposed taxing carry at the personal income rate (as, critics say, you might expect from someone who amassed part of his fortune this way).

They say: “I suspect that if Mitt Romney gets the Republican nomination [the public pressure on the industry] will get worse because I think… the Democrats will attack him on private equity and villainise the industry even further,”  Tony James, president of The Blackstone Group, told CNBC in September.


About: Cain has never held elected office, but he does boast a strong business track record. After a stint at Coca-Cola, he spent most of his career at conglomerate Pillsbury, where he turned around Godfather’s Pizza before leading a management buyout in 1988. He remained as chairman and CEO until 1996.

Policies: Cain’s snappily-titled ‘9-9-9’ plan involves cutting personal and income taxes to 9%, while introducing a 9% sales tax (eventually he wants to abolish all income taxes, to be replaced by a consumption tax). Cain also coined the term “financial regulatory deform” to describe the Dodd-Frank Act – which he wants repealed. “The sweeping legislation posed new restrictions and created new regulations for many sectors of the financial industry.”

They say: “Cain is an interesting side show,” says a New York-based CFO. “There is a lot of respect for what he accomplished in the private sector, but his understanding of private equity is limited. His tax views are interesting, but I don’t think he’s seen as an ally.”


About: Texas governor Rick Perry, considered the favourite until some major missteps in the last few weeks, has apparently been trying to tap the industry for funds, according to one Washington, DC-based lobbyist. “It’s clear that he’s looking to private equity [GPs] for fundraising,” the lobbyist told Private Equity International. “He has made several trips to New York – some publicised, others not.”

Policy: Perry’s position on carry tax stance remains uncertain. He’s been much clearer on Dodd-Frank, though: he wants it repealed, immediately. “It’s no wonder that banks and credit unions are afraid to lend money, because it’s the onerous regulatory climate that’s killing the jobs, that’s killing this economy,” says Perry.

They say: “During a September [Republican] debate, Perry blasted Romney’s Bain experience,” the lobbyist tells PEI. “He’s walking a fine line.”


About: As president, Texas Representative Ron Paul would “support a Liberty Amendment to the Constitution to abolish income and death taxes.  And he will be proud to be the one who finally turns off the lights at the [Internal Revenue Service] for good”, according to his campaign website.

Policy: Paul’s stance on tax reform is clear: he wants to abolish capital gains tax altogether. But when it comes to financial regulation, Paul is more interested in dissolving the Fed – which he blames for the financial crisis – than on repealing Dodd-Frank (although he did vote against that bill).

They say: “His regulatory goals are too macro,” one New York-based compliance officer told PEI. “We’re hoping for someone that understands the challenges. Ron isn’t that guy. He’s a physician first, politician second; business doesn’t factor in.”


About: Gingrich enjoyed a successful spell as the Republican Speaker of the House between 1995 and 1999, where he was a thorn in the side of President Bill Clinton. He announced he would run for the presidency in May, but so far his campaign has failed to gather momentum. He has virtually no business experience, having spent his career in academia and politics.

Policy: Gingrich has made the repeal of Dodd-Frank a key element of his plans; he has described it as “a devastatingly bad bill” that is “killing small banks, killing small business, killing the housing industry… [It’s] a recipe for American prosperity to die slowly.”

They say: The Gingrich campaign “stalled as soon as it started,” says one lobbyist. “Newt is struggling with the business community.”


About: Minnesota representative Bachmann (the darling of the Tea Party until Perry’s emergence) qualified as a lawyer and spent five years working for the Internal Revenue Service, before leaving in 1993 to become a full-time mother. She and her husband now own and run a Christian counselling practice.

Policy: Bachmann has regularly attacked financial reform, and often reminds voters that she introduced the first Dodd-Frank repeal bill earlier this year. She is equally fervent in her opposition to tax hikes. “The president should… truly reform the entire tax code so it is fairer and flatter on all Americans, and get rid of job-killing regulations, which will create millions of jobs,” she says on her website.

They say: In a Washington Post/Bloomberg poll in October, Bachmann was voted as the Republican candidate that “would do the most damage to the economy”. Doesn’t really bode well for her chances…


About: Former Utah Governor Jon Huntsman is a long-time politician and diplomat, though he did spend eight years working for the family business – Huntsman, a New York-listed chemicals company. Recently, he spent two years as the White House’s ambassador to China.

Policy: Huntsman wants to repeal not just Dodd-Frank, but also the Sarbanes-Oxley law passed in 2002. However, his views on taxing carry will be less appealing: in an interview with CNBC on August 23, Huntsman said he supports “closing loopholes, repealing deductions and ending corporate welfare” – and specifically mentioned the tax breaks enjoyed by private equity and hedge fund managers.

They say: “Huntsman falls in line with the front-runners on Dodd-Frank,” says a New York-based lawyer. “His position on Sarbanes is seen as a little extreme, but asset managers are thrilled with his tone.”


About: Former Pennsylvania Senator Rick Santorum, who is currently trailing the pack, qualified as a lawyer before being elected to the House of Representatives in 1991.

Policy: “Rick Santorum believes we need to reduce taxes on individuals across the board, making the system simpler, flatter, and fairer,” his campaign site says. That includes extending the current capital gains and dividend tax rates. Removing regulatory burdens is also high on his agenda.

They say: “Santorum’s message is focused on repealing health reform and repealing environmental regulations,” says the lobbyist. “He doesn’t see much hope campaigning for private equity dollars – he figures Romney and Perry are [the industry’s] preferred [candidates].”