China: 'The Best Place to Invest in the Next Five to 10 Years'

China Knowledge@Wharton: How do private equity firms make companies better?

Rubenstein: Private equity firms can operate in private settings. They don't have to worry about quarterly numbers, increasing stock prices . They can make longer-term investments. They can make companies operate more efficiently. Studies have been done which show that private equity-operated firms increase employment, make companies more profitable . So I think it is unfair and unfortunate that our image isn't as good as the reality. But in truth, if you have a five-year period of time that you can operate in the private setting, you can make companies much more valuable by doing things you are afraid to do and wouldn't be incented to do in the public setting.

China Knowledge@Wharton: Currently, private equity firms pay a 15% capital-gains tax on their carried interests. There is a debate on whether they should be taxed at a 35% ordinary-income-tax rate. If you were asked to testify before the Senate, how would you justify the lower rate?

Rubenstein: The reason that most countries, including the United States, distinguish between capital gains and ordinary income in terms of tax rates is that they try to incent people to build business and create jobs. That's what you do when you invest capital.

What we are doing is creating jobs. We are investing capital. Most of the capital is the capital of our investors, and we invested alongside. What we do takes a great deal of risk. If we don't succeed in our jobs, we don't make any money and we will lose our own money that we have invested. So we have to convince members of Congress that, in fact, we do create jobs, and we take the capital risks with our money and other people's money that deserve capital-money treatment.

Treating private equity with the carried interest of 15% -- that's the same thing that has been done in the oil and gas business, the venture-capital business and the real estate business for generations. So all we are doing is being treated in the same way as other businesses in the United States. We are not asking for favorable treatment. We are doing the same thing as other entrepreneurial industries are doing.

China Knowledge@Wharton: Some experts consider private equity to be one of the most expensive forms of financing. Why is that?

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