September 16, 2016
Interviewed by: David Snow
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Private Equity on Capitol Hill: An Insider’s View

Mike Sommers, president and CEO of the American Investment Council, one of private equity’s leading trade associations, discusses the political climate and its impact on the industry.

Mike Sommers, president and CEO of the American Investment Council, one of private equity’s leading trade associations, discusses the political climate and its impact on the industry.

Private Equity on Capitol Hill: An Insider’s View
With Mike Sommers of the American Investment Council

David Snow, Privcap:
Today, we’re joined by Mike Sommers of the American Investment Council. Mike, welcome to Privcap. Thanks for being here.

Mike Sommers, American Investment Council:
David, thanks for being here.

Snow: Your organization is in Washington, D.C. and it advocates on behalf of the private capital industry. We’d love to hear what you’re following carefully on Capitol Hill. Without asking you to make a prediction about the election, if one or both Houses of Congress becomes [majority] Democratic or falls to the Democrat party, what are some potential issues that come into play that maybe are not in play right now?

Sommers: I don’t know that I have any big predictions as to what’s going to happen in November, but this is an organization that seeks to educate members of Congress about the big issues facing the private equity industry. We need to make sure that our tax code is pro-growth and it’s fair to the industry going forward. I do think, as you look at the electoral landscape right now, that the House is likely safe to stay in control of the Republican Party. I think the Senate, which is currently controlled by Republicans, is probably a 50/50 split at this point. One of the things we’re working very hard on is ensuring that the education is done on both sides of the political aisle to make sure they understand the importance of private equity going forward.

We do a big study at the beginning of every year that focuses on private investment in congressional districts and states. One of the things this study showed this year is that, of course, every state in the Union has significant private equity investment in almost every congressional district. That is not something that most economic functions in this country can say—that they have investments in almost every congressional district.

Snow: Do members of Congress understand the distinction between hedge funds, private equity funds and venture capital? How much further do we have to go on that level of education?

Sommers: Almost every two years there’s a 20% to 30% turnover in Congress. And not a lot of them have a lot of experience with private capital and private equity. So, we spend a lot of time educating members of Congress and their staffs on the importance of private equity. The other important point is that there are hundreds and hundreds of issues that these members of Congress deal with on a daily basis. So, our job as an association is educating them. I do think there’s confusion between the difference between a hedge fund and VC and private equity and it’s our job to ensure that they understand the impact that private equity has on the American economy.

Snow: What is a key argument that you make to keep the treatment of carried interest the same?

Sommers: As we get to a place where there is potentially comprehensive tax reform, it’s incumbent upon this organization—and other organizations that care about this, like real estate and those that represent venture and others—to make the case for why carry is important in the economy. One argument I make, particularly as we get to comprehensive tax reform, is the importance of recognizing the pro-growth elements to how carry is currently treated.

For example, as we’re looking toward a scenario where we’re trying to grow the American economy—which has seen really anemic economic growth over the last 10 years—one of the areas we can point to, and one of the ways I think we’ve been able to promote growth, is through the entrepreneurial way that carry is currently taxed. I always try to point to— when you’re looking at comprehensive tax reform, you should really be trying to promote entrepreneurship in the way that carried-interest taxation currently does.

So, I think we have great arguments going forward on carried-interest taxation and I look forward to making that argument as we get into a comprehensive tax-reform environment.

Snow: The SEC, of course, is now taking a much closer look at private equity. Are you in touch with the SEC? Are they in touch with you? What do they want to know?

Sommers: We have a very robust regulatory operation at the AIC and we’re in constant contact with the SEC to ensure that our voice is heard. Private equity is continuing to get more scrutiny form the regulatory community. Of course, we believe that is just. The private equity industry has grown exponentially in the last 10 years. Of course, we should expect a smart regulatory environment from the SEC and our other regulators. And we want to make sure that regulation…makes sense for the industry going forward.

Snow: I’m guessing a big risk for private equity is that rules and regulations intended to fix problems that did not emanate from private equity are applied to private equity. For example, if Bernie Madoff inspired rules applied to private equity firms would be a perverse side effect of new regulations.

Sommers: David, that’s absolutely right. And one of the things we try to do—this isn’t just an education effort for new members of congress and their staffs, but [it’s] also an education effort for the regulators who haven’t always had a lot of experience with the private equity industry. This is about ensuring that they have the information and the knowledge that they need to properly regulate the burgeoning private equity industry.

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