The Real Robber Barons
So the chief of the California Public Employees Retirement System, Joe Dear, in an interview with the Wall Street Journal, said private equity managers "risk becoming the robber barons of the 21st century" if they don't support President Obama's desire to more than double the taxes they pay on "carried interest."
First, no one is forcing Calpers to invest the 15% of its portfolio that it does in private equity.
Second, if anyone in the country is in a position to appreciate the virtue of capital gains treatment for long-term capital gains of both founder's stock of entrepreneurs and the carried interest of venture capital managers (a form of private equity), you'd think it would be California, home to Silicon Valley, Facebook, and Google, and all the jobs and state and local tax revenue they create.
Third, this is a public pension system still trying to live down stories like this one from March 2011 in the Los Angeles Times, which ran under the headline "Stench of CalPERS' Financial Scandal Lingers" and reported:
Or this one, from the Stanford Daily, reporting on a Stanford professor's finding that the California public pension system is underfunded by "anywhere from $498 billion to $142.6 billion," a situation so severe that even the state's Democratic governor is talking about moving at least partially to a 401K-style defined contribution plan for state employees and raising the retirement age to 67 from 55.
If anyone in this story is a robber baron, it's not the private equity executives, it's Calpers.
Fourth, one wonders where in Calpers' mandate or enabling legislation comes the assignment to opine on federal tax policy? Don't these guys have enough to worry about managing the investments without trying to manage federal tax policy on the side?
Fifth, what tax does Calpers pay on its investment gains? Zero, which is a lot less than the so-called robber barons in private equity.
Sixth, why is the Calpers guy singling out private equity and not managers of real estate or oil and gas investment partnerships, who are taxed the same way? And why doesn't he mention venture capital? Is it because "venture capital" means California, while "private equity" sounds like those guys at Blackstone or KKR in Manhattan?
One might remember, as well, the original robber barons. This Wall Street Journal piece by Daniel Henninger, this one by Amity Shlaes, and this one from City Journal by Maury Klein help to correct the historical record. If there's even a grain of truth in the Calpers chief's characterization of the private equity guys as "robber barons," it relates to the degree to which some have prospered not through delivering excellent investment returns or excellent money management, but by using political connections or other special preferred status to extract vast funds that ultimately come from taxpayers, and then charging fees for managing those funds. Elsewhere on this site we've called it state-pension-fund capitalism or the government-financial complex.
I actually think Calpers plays a constructive role sometimes in advocating for shareholders on some corporate governance issues, but statements like this one are the sort of thing that make people think the best course would be to shut the whole thing down and let the individual state employees manage their own investments the same way most private-sector employees do nowadays.
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