Private equity powers the candidates

By Michael Brush

If this is the year of the buyout on Wall Street -- Hilton Hotels (HLT, news, msgs), Harrah's Entertainment (HET, news, msgs) and DaimlerChrysler's (DCX, news, msgs) Chrysler unit are going private this year, to name just a few -- then it's also the year of the private-equity presidential candidate.

Mitt Romney and John Edwards have worked for big funds. And there are three candidates based in or near New York City -- Rudolph Giuliani, Christopher Dodd and Hillary Rodham Clinton -- all of whom are drinking deeply from the private-equity cup.

What do the rich and powerful at hedge funds and private-equity shops like Blackstone (BX, news, msgs), Fortress Investment (FIG, news, msgs), Bain Capital and SAC Capital Advisors hope to get for their money?

A lower tax rate, for one. The recent initial public offering of Blackstone put a spotlight on the hundreds of millions of dollars a year that top managers at these kinds of investment shops make. As those dollars roll in, the question for Washington is how much the folks who run the funds get to keep.

They typically get away with paying a lower tax rate because most of their income comes in the form of capital-gains distributions from their investment partnerships. As such, the income is taxed at the 15% capital-gains rate instead of the 25% to 35% that most regular folks pay on their "ordinary income."

Democratic presidential candidates, including Clinton, Barack Obama and John Edwards, are denouncing the discrepancy and backing legislation to close the loophole.

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Despite that stand, the Democrats are perfectly willing to take money from private-equity shops, which have given $2.4 million to the top six Democratic candidates and $1.7 million to the top three Republican candidates, according to Center for Responsive Politics.

Wall Street in Washington

Below is a quick look at just how much money the candidates are taking from hedge funds and private equity. Keep in mind the investment shops identified below aren't themselves making the contributions. Their employees and members of their families are.

But the Center for Responsive Politics, which supplied these numbers, can track how much money came from employees at specific investment shops by examining Federal Election Commission filings. All numbers are as of July 15.

Mitt Romney: He tops the list of presidential candidates getting money from private-equity shops and hedge funds at $797,325. It's no big surprise that the biggest contributor in this space was Bain Capital, whose workers have given him $109,000. Romney worked for years at Bain Capital after founding it with two partners from the consulting group Bain & Co., which has given Romney's campaign $99,500.

That $797,325 may seem like a drop in the bucket given that Romney has raised more than $44 million to date, but don't be fooled. Generous donations from employees at private-equity firms and hedge funds ensures them a high ranking on the top-20 list of Romney's corporate sponsors.

Bain Capital and Bain & Co., for example, rank No. 4 and No. 5, respectively, among all Romney sponsors. Goldman Sachs (GS, news, msgs) and Merrill Lynch (MER, news, msgs) -- which also make a lot of money by running private-equity shops and hedge funds -- rank No. 1 and No. 2, respectively, among Romney sponsors, giving him $182,725 and $124,300.

Christopher Dodd: Next up, private equity and hedge funds are shoveling a lot of money at Dodd, a Democratic senator from Connecticut. He's received $726,950 so far. It's easy to see why: He chairs the Senate Banking Committee, which has a lot of say about what happens on Wall Street.

The hedge fund SAC Capital Advisors is his biggest single contributor, at $349,700. SAC Capital is a Stamford, Conn., fund whose chief executive, Steven Cohen, ranked among the five highest-paid hedge-fund CEOs last year at $900 million, according to Alpha magazine. Cohen has personally given Dodd $4,600.

But like many the hedge funds, SAC Capital takes care to diversify its portfolio of presidential candidates. The fund's employees have also given to Clinton, New Mexico Gov. Bill Richardson, Edwards and Rudolph Giuliani. Financial-services giant Citigroup (C, news, msgs) and brokerage firm Bear Stearns (BSC, news, msgs), which run hedge funds, also place among the top five Dodd donors.

Hillary Rodham Clinton: She's received $703,600 so far from private-equity shops and hedge funds. But none of them ranks in her top 20, a list dominated by law firms. Citigroup, Goldman Sachs, Morgan Stanley (MS, news, msgs) are among the top five contributors, though.

Barak Obama: He likes to claim he gets a preponderance of donations from small contributors. But private-equity companies and hedge funds also rank high among his supporters. They have given him $652,105 so far. Citadel Investment Group employees have contributed $169,000, making Citadel his fifth-largest contributor. Its employees have also given to Dodd and Sen. John McCain and Giuliani. Goldman Sachs and Lehman Bros. (LEH, news, msgs) are Obama's two biggest corporate sponsors.

Rudolph Giuliani: The hedge fund Elliott Management is making a concentrated bet on the former New York City mayor. Its employees have given Giuliani $224,850, with only one employee giving to another candidate, Obama, according to the Center for Responsive Politics. So far, Giuliani has gotten $644,750 from hedge funds and private equity.

John McCain: The Arizona Republican has taken $255,950 from private equity and hedge funds, including $35,300 from Blackstone.

John Edwards: Among the leading candidates, he comes in last for hedge-fund and private-equity donations, but one player in the space, Fortress Investment, is his second-biggest corporate contributor. Edwards has worked for them. Fortress employees have given Edwards $187,850, but they have also given to Obama, Dodd, Romney, McCain, Giuliani and Clinton. Edwards has gotten $218,290 so far from hedge funds and private equity.

Continued: Eschewing scrutiny

Eschewing scrutiny

Besides trying to throw the debate on how their personal income gets taxed, hedge-fund managers hope to ward off attempts in Washington, D.C., to complicate their lives with more rules.

Right now, hedge funds -- which managed $2.5 trillion in assets -- are more lightly regulated than mutual funds or brokerages. And they want to keep it that way. But many critics, including Rep. Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, believe that loose oversight of the industry is just an accident waiting to happen.

That's because many hedge funds borrow large amounts to place concentrated bets on derivatives or other financial instruments, which could blow up and cause serious collateral damage to their lenders or others. The collapse of Long-Term Capital Management in 1998 came close to setting off a chain reaction that threatened the global markets until it was bailed out.

Robert Steel, the undersecretary of the Treasury in charge of domestic finance, says the administration policy is to rely on the vigilance of those who lend money to hedge funds to keep us all out of trouble. Gene Sperling of the Center for American Progress questions whether this is enough, because lenders care most about their own risks and not about potential risks to the whole financial system.

Bad returns?

If, from the perspective of private-equity shops and hedge funds, Democrats consistently come down on the wrong side of these issues, why are they giving Democrats so much more money than Republicans?

"They're not getting the appropriate return on their investment," quips Morris Reid of Westin Rinehart, a public-relations and political-consulting company. Yet contributions from private equity and hedge funds continue to favor Democrats 1.4-to-1.

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The answer may be that private equity and hedge funds already have Republicans on their side. So it's the Democrats they have to influence to get their way. Or their giving could just be part of a bigger trend. Overall, donations to Democratic presidential candidates outpace Republican contributions by a ratio of 1.5-to-1.

There may be some investing intelligence in the increase in political donations by private-equity shops. According to one recent study, you can expect market-beating performance from the stocks of companies that give more to political campaigns, especially those of Democrats. So though some observers took the recent initial public offerings of Blackstone and Fortress as a sign of the top of the market in their line of business, their robust campaign contributions may suggest otherwise.

At the time of publication, Michael Brush did not own or control shares of any companies mentioned in this column.