Charlie Rose Talks to Jonathan NelsonBy
In the public mind, private equity is lumped together with proprietary trading and hedge funds. Is that fair?
I think we get off on the wrong track by the name. In an age of transparency, anything that's private doesn't sound very good...and some of us are even public companies. Our debt is always registered in public and traded. And many of the companies we invest in, if they're not public themselves, operate under the scrutiny of regulators. So there is a transparency around our activities. A better name might be partner capital, growth capital, and long-term growth capital. There have been interesting studies over the past year: BCG, Bain, McKinsey, and others have studied how private equity actually creates value. It turns out we underestimated the good work we do. Over 80 percent of the value we create is in improving the operations of a business.
The ugly side comes from the notion that some people with capital borrow a lot of money, buy a company, strip and sell it, then walk away from it with a profit— or walk away after a lot of people are hurt and lose their jobs.
There are a couple of stories that have been widely reported in the press where that indeed has happened. But it's a small subset of the transactions today. It's much more often the case that companies flourish under the ownership of private-equity firms. And I think that will be increasingly the case. The days when you could cut costs and do well, they've been over for a decade.
Does private equity get an unfair tax advantage? [Profits paid to private-equity executives now qualify for the 15 percent capital gains rate. A proposal before Congress would tax the income as wages, with a top rate of 39.6 percent.]
When I take my private-equity hat off, I think: "Well, how would I view this if I were not engaged in this business?" Then I say: "All right, I don't like the notion of someone who's doing really well paying a lower marginal tax rate than someone who makes less money." That seems inherently unfair. So it seems to me the solution is a tax code [revision] that affects all partnership accounting—not just private equity but real estate, oil and gas development and exploration, and other partnership models. If we don't like people paying low marginal tax rates who do well when they create equity value, then let's apply that standard to everyone, not just a group. Seems un-American to me to single out a group for whatever reason and say we're going to change their tax rate.
You could live with it if they changed the tax rate, though?
We could live with it if they changed it overnight. Absolutely.
How will private equity be influenced by financial reform?
We actually should be irrelevant in the conversation because regulation today is or should be focused on what triggered the crisis two years ago. But reform could affect us if it gets off track. If we reduce the size of banks and limit their activities, it could have a negative effect on private equity.
Do you focus on media because it's of particular interest or because you think it has the highest return?
It's exciting, it's growing, everybody is interested. But you know, I have to go back to our beginnings. We started in cable television roughly 20 years ago. We thought we were bold when we moved into radio and television.
So you grew up in Providence and went to Brown. Where did you go to work when you got out of college?
I went to work for a company called Wellman in Boston, except within a week of graduation, I was off in China. It was roughly 30 years too early, but it was the right idea. China couldn't have been a more stimulating experience. This was 1977-80, before we had diplomatic relations.
Was it a smart move or a dumb move for Google to pull out of China?
I think it made sense for Google.
To say you can't censor our stuff, and we're not going to censor it for you?
I would have handled it differently. You need a long-term perspective to look at really anything in China. They have a very different timeline than we do. And I think that most of what Google hopes to achieve, the Chinese will get there at their pace, not our pace. It is, after all, their country. While I understand the tension, I see both perspectives. We recently partnered with Baidu, which is the Google of China. For us, we would rather participate in change than engender change by withdrawing.
So where will China be in 25 years?
We'll be looking up to them.
Watch Charlie Rose on Bloomberg TV weeknights at 8 p.m. and 10 p.m.