Tock Research As Hedge Fund Industry Private Equity Gets Hotter Heat Is Building On Them Too

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Tock Research: Rising Pressures on Hedge Funds and Private Equity


Overview


During George Bush's administration, the hedge fund and private equity sectors operated with significant freedom under a Republican-controlled Congress. This landscape shifted dramatically in November 2006 when the Democrats took over Congress, bringing new challenges and responsibilities to address fiscal deficits that grew under Republican leadership.

The Political Shift and Economic Reality


Interestingly, despite being viewed as the party of fiscal conservatism, the Republicans were responsible for around 80% to 90% of the national debt accumulation. Yet, the perception persists that the Democrats are the bigger spenders. Recently, major newspapers highlighted Bush's call for Democrats to rein in spending.

Politicians favor spending over cutting expenses. Therefore, to bridge the gap between spending and revenue, the Democrats are likely to increase taxes. This shift brings hedge funds and private equity under scrutiny.

Tax Code and Special Interests


Under the current tax code, hedge funds and private equity benefit from favorable tax treatment, with certain incomes taxed at a 15% capital gains rate, rather than the higher ordinary income rate. The tax code, comprising 80,000 pages, caters to various special interests, including farmers, restaurants, and financial entities, each lobbying for beneficial provisions.

The Response of Financial Leaders


Leaders like Henry Kravis of Kohlberg Kravis Roberts (KKR) are now lobbying in Washington, as Democratic Congressman Sander M. Levin proposes significant tax increases on private equity income. Despite Kravis's vast wealth, he remains keen on minimizing his tax burden, a stark contrast to Andrew Carnegie's philanthropic ethos.

When questioned on whether higher taxes on private equity would harm pension fund returns and affect middle-income families, Kravis responded negatively, ending the meeting quickly.

Industry's Defensive Stance


In response, financial figures like Stephen Schwarzman of the Blackstone Group and David Rubenstein of the Carlyle Group are actively engaging with regulators to delay regulatory changes. New lobbying groups, heavily funded by private equity and hedge funds, are rapidly forming to counter Washington's scrutiny.

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