Private Equity Model Benefits Non-Profits, Entrepreneurs, Lowenstein tells MMTC
Broadcasters should support the private equity investment model, under intense Hill scrutiny of late, Private Equity Council President Douglas Lowenstein said Monday at a Minority Media and Telecommunications Council conference. Congress is looking into raising the tax rate on private equity fund managers. House Commerce Committee Chairman John Dingell, D-Mich., and Telecom Subcommittee Chairman Ed Markey, D-Mass., recently queried FCC Chairman Martin on private equity holdings in media and telecom (CD July 16 p9). The debate over private equity’s tax rate likely will drag on through the fall, he said. “The environment is very fluid.”
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Private equity investors bring businesses two types of investment, cash and expertise, and both should remain taxed at the capital gains rate, Lowenstein said. “It’s a principle that’s been a hallmark of our tax law for decades,” he said. “If we change it, the essence is we're going to tax the labor part of this at regular rates.” That would hurt entrepreneurs who invest in new companies with their own labor, he said. Plus, private equity makes loads of money for non-profits and foundations that invest with them, he said. “It’s proven to be an extraordinary investment class.”
The Private Equity Council has no position on the FCC media ownership limits, now under review, said Lowenstein. He joined the group upon its formation in February after leaving the Entertainment Software Association. When council members have run up against those rules in media acquisitions, they address them case by case, he said. “I'm not sure I see that as an industry-wide issue,” he said.
Investors should note the Dingell/Markey query to Martin on private equity involvement in media and telecom, Stanford Group analyst Paul Gallant wrote. Private equity-backed deals have buttressed broadcast stocks in the last year, he said, and “any indication that the FCC could make it tougher for private equity to buy radio and TV stations should be closely monitored.” Martin probably won’t discourage further private equity deals in his response to the Hill, due July 20, but likely will acknowledge a need for government to monitor the situation, Gallant said.
Assembling financing for start-up entrepreneurs to buy media assets remains difficult despite vast amounts of capital entering the market, lenders and private equity investors said Monday at the conference. Private-equity firms, hedge funds and institutional investors are eager to put money into broadcast deals, but often eschew entrepreneurs new to the industry in favor of larger players. They are not interested in smaller deals whose returns are smaller, officials said. “The bigger lenders are attracted to the large deals,” said David Meier of Gladstone Capital.
Minorities and broadcasters seeking to buy their first stations face high bars getting loans and equity. Financing for single-station deals is next-to-impossible to find, with lenders and investors looking for scale, said Anita Graham of Opportunity Capital Partners. It is “virtually impossible” for a single station to produce the returns that private equity groups want, she said. Her group prefers deals that involve multiple regionally clustered market-leading stations, she said. “You have to be able to take advantage of scale.”
As those private equity groups seek out richer deals, smaller investors are replacing them, said Evan Blum of Communications Equity Associates. These groups often look to leverage broadcasters’ rich cash flows and perform “financial engineering” to make deals profitable, he said. New broadcasters should avoid buying stations through private auctions; sellers aren’t interested in making a deal without an equity-backed buyer and new buyers will have trouble raising the equity, he said. “You've got to come in with equity or you won’t be taken seriously.”
A case in point is the sell-off of Clear Channel’s small market radio stations. Those generally went to larger buyers able quickly to assemble financing, said John Brooks of Wells Fargo Foothill. “The people who ultimately got the deals were the people that made it easy on Clear Channel,” he said. -- Josh Wein
MMTC Notebook
The federal government needs to do more to encourage rural broadband build out, said Joseph Waz, Comcast vice president of external affairs and public policy counsel. “We need to focus on where broadband isn’t and how to get it here,” he said. One roadblock: Not all Americans own personal computers, he said. “There’s still a significant computer ownership gap… I don’t know that 100% is ever in the cards.” Still, increased broadband penetration serves no use if folks don’t have computers, he said.
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Broadband deployment helps the environment, USTelecom President Walter McCormick said. By allowing workers to telecommute, increasing U.S. broadband penetration will keep workers off the roads, he said, listing a handful of reasons why government should encourage carriers to build out broadband networks.