Romney factor, regulation prompt private equity image review

HONG KONG Fri Nov 11, 2011 4:18am EST

HONG KONG Nov 11 (Reuters) - The private equity industry is embarking on another round of soul-searching as it faces growing regulatory and political pressure, according to buyout executives assembled at a conference here this week.

Henry Kravis, a pioneer of the industry, said scrutiny of private equity would only heighten if Mitt Romney was nominated for the Republican party in the U.S. presidential elections. Romney is the former head of buyout firm Bain Capital, and his background in the industry has bubbled up during his previous political campaigns.

"If he is a nominee, well, hold your seats," said Kravis at a gala dinner for the conference this week.

Another factor fueling the push for an image re-make is that several major private equity firms are now publicly traded, and no longer able to keep certain aspects of their business behind closed doors.

While the tone of several speeches was to open up more, the executives were hesitant to endorse too much tampering with the industry.

"We need to make sure that government is leaving the industry alone," said David Rubenstein, co-founder of Carlyle Group, at the annual AVCJ conference in Hong Kong.

Rubenstein's list of changes for the industry included opening up to smaller investors, creating a global body to impose industry standards, improving corporate and social responsibility, and even changing the name "private equity".

"These are changes which, if not made, I think in some cases will actually be imposed," said Rubenstein, who co-founded Carlyle Group in 1978.

The industry was known as bootstrap financing decades ago, then as leveraged buyout shops. Then the industry deliberately moved to change the name to private equity, losing the "leveraged buyout" tag that some felt carried negative connotations.

Rubenstein also advised that tax treatment of the industry would have to be addressed as governments would continue to raise the issue. Around the time of the 2007 credit boom and bust, U.S. politicians looked into raising the corporate tax rate on private equity firms, which is half that of non-investment companies and citizens.

U.S. private equity, venture capital and other related firms were given this tax status years ago to reward them for risking capital on investments in the market.

The "Schwarzman tax" as some called it at the time came on the heels of Blackstone Group's landmark IPO, which put several billion dollars in the pockets of Blackstone Chief Executive Steven Schwarzman and co-founder Pete Peterson. The issue died after the 2008 financial crisis.

Around this time, an industry body was created in Washington DC to represent private equity across the United States.

THE ROMNEY FACTOR

Kravis, a founding partner of KKR & Co LP, noted during a key note speech at the AVCJ that unwanted attention would shift to the industry if Romney won the nomination.

"There is no doubt that the Obama administration will clearly come out after Mitt Romney and the whole private equity industry," said Kravis, a pioneer of the private equity industry, who co-founded KKR in 1976.

Kravis said private equity should aim to make its returns through improving portfolio companies rather than financial engineering.

"They're going to describe us all as asset strippers, we're flippers of assets, we just put on a lot of debt, fire a lot of people and that's how we make money," Kravis said. "You know that's not the case. That's absolutely not what we do."

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