Opinion: Private equity plays positive role in California’s economy

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Mike Montgomery
Executive Director
CALinnovates

As our state and country prepare for next year’s elections, campaign season inevitably sparks a debate over how best to create more jobs and continue to grow our economy. Notably, this comes at a time when the U.S. economy grew by more than three percent in 2018 – the fastest pace since 2005 – and in particular, California’s economy grew at a strong pace through this summer, even as national Gross Domestic Product growth slowed.

A key reason for that has been continued growth and expansion in the tech sector which has helped make our state the fifth largest economy in the entire world. With a GDP of $2.9 trillion, California would fall between Germany and the United Kingdom in the world’s top economies if it were its own country.

That’s why it’s concerning to hear some elected leaders put forward economic proposals that would undermine future economic growth. In particular, the private equity industry, which has been a driving force behind many of tech’s success stories, has been in the crosshairs by some who have sought to make “Wall Street” a bogeyman in next November’s election.

However, a new national economic study by Ernst & Young (EY) tells a much different story and reveals why elected officials in both parties should be careful not to advance legislative policies that would roll-back the economic progress that’s been made in recent years, particularly in tech.

The EY study shows that the private equity industry, alone, directly supports 8.8 million jobs across the country, and when you take into account suppliers to private equity-backed businesses and related consumer spending, that number grows to 26 million jobs.

In California, private equity directly employs 1.1 million workers who earn roughly $73,000 per year in wages and benefits on average. Private equity also supports 10.4 million workers across the nation in related consumer spending. When you add related supplier and consumer spending, the total number of jobs private equity supports grows to 2.4 million throughout the state.

And while private equity supports businesses of all types, large and small alike, its role in keeping California as the nation’s technology and innovation leader cannot be ignored.

California-based tech businesses like Riverbed Technology, Calypso Technology, TIBCO Software and VXI Global Solutions are just a few examples of how private equity is investing in technological innovation that creates good jobs in our state.

Another is Sacramento-based Greenleaf Power, a leading provider of renewable energy that is focused on turning biomass into electricity. Greenleaf Power directly employs nearly 150 Californians, while creating close to 500 jobs local dedicated jobs of collecting, processing, and delivering fuel and consumables to its generating plants.

Meanwhile, nationally-known brands based right here in California – like California Pizza Kitchen, Peet’s Coffee & Tea, 24-Hour Fitness and Drybar – are also backed by private equity.

And, in addition to supporting millions of jobs and driving economic growth, the EY report also shows the important tax contributions private equity makes to states and communities, including $8.7 billion in state and local taxes in California alone. That tax revenue funds investments in our schools, roads and bridges, public safety and more.

Along with state and local taxes, private equity also helps in strengthening state’s pension funds which is shown in a separate report produced by the American Investment Council. The study reveals that private equity continues to lead all asset classes in long-term investment performance, with private equity’s median 10-year annualized return of 10.2% surpassing public equity’s 8.5% and real estate’s 4.7%. Along with this, the Chief Investment Officer of the California Public Employees Retirement System (CalPERS), the largest public pension funds in the nation, has invested more than $27 million in private equity.

From supporting jobs, to growing our economy, promoting California’s role as America’s innovation leader, investing in our communities and even supporting secure retirements for millions of public servants, private equity plays a vital and growing role in California’s economy and in the financial well-being of families throughout our state and nation.

Mike Montgomery is the Executive Director of CALinnovates of San Francisco, California. He graduated from the University of Washington and has extensive experience crafting solutions to regulatory, political and legal challenges in the private sector. 

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