Interview with Mel Epstein
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio video between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and Mel Epstein, Managing Director & CFO of M&C Group.
Visit www.CFOstudio.com to read about this interview and to watch the entire video interview.
Taxes and the Private Equity Sector
Zezas: Hi, this is Andrew Zezas, your host at CFOstudio.com. We’re lucky enough again today to have Mel Epstein with us. Mel participated in one of our previous interviews and had some great ideas and so many of them that we invited him to come back. Mel, it’s great seeing you again. Thank you for being here on CFO Studio.
Epstein: Thank you Andy. It’s great to see you again. You’re a clever partner.
Zezas: I love the last interview. You had a great analogy on the economy being compared to a scuba diver and how he should rise slow and how the economy should rise slowly as well. I wanted to talk to you about some other issues today. We talked about corporate governance. We talked about the private equity market and the stock market. Let’s start off with private equity.
Epstein: Andy, let me go back a bit because I do want to pick up on some of the items that we didn’t fully cover last time. Why don’t we just go back to last time. One of the things that we were in the middle of, we were talking about the economy, we talked about jobs, we talked about housing. I just want to share with you a couple of thoughts that I had on housing and jobs and these are a little controversial, but let’s go for it. Why the hell not. I think, clearly jobs and housing are the problem. I have a very different opinion on housing. I think that it’s clear to me that as the government and banks have reduced mortgage rates, that hasn’t sold houses. It’s very clear that it’s because of an issue that we discussed last time and that is that it’s not the interest that’s the factor, it’s the fact that banks aren’t willing to give a loan to employees because the employee may not have a full-time job. So, I think we’ve got to get away from the idea of lowering interest rates.
Zezas: You’re talking about the concept of a temporary employee vs. a permanent mortgage.
Epstein: I said that last time. I said temporary employees, which is what this economy is full of, don’t take out permanent mortgages. Banks don’t want to loan permanent mortgages, permanent loans to temporary employees. So, be that as it may, there is another issue that is equally important and that’s taxes. There’s a lot of talk these days about taxes and I’m very sensitive to it, as you are. No one likes to pay a lot of taxes.
Zezas: No, I want to pay a lot of taxes.
Epstein: I doubt that, but I think that what you really want to do is know that the taxes that you do pay are being properly spent. And, I think that the objection that most people have is that no one has come out and said to us that you’re taxes are being smartly spent. So, everyone is against it, but meanwhile we’re spending a lot of money because we have to because of government. We’re incurring huge defecits and there is a lot of talk these days, it’s a very current issue, about what happens when the current tax rates expire and reduced tax rates expire in January. My position is that we should let it expire on people earning significant amounts of money. And the government has pegged $250,000, the number you can discuss, we can change that or not.
Zezas: Higher income earners.
Epstein: I do believe that higher income earners go back to the previous tax rates. Here’s why, we’re talking about a 3, 4, 5% increase in taxes on those people.
Zezas: Not significant.
Epstein: It’s not significant and I would suggest to you that the only reason to you to not increase taxes is because it reduces demand. That’s bad for the economy. However, increasing taxes on people earning half a million dollars or more is not going to change their spending habits.
Zezas: If it’s a small increase.
Epstein: If it’s a 4% increase, it’s not going to change demand. Therefore, collecting taxes from those people will help the government without hurting the economy. That to me sounds like a good combination.
Zezas: That’s an interesting perspective.
Epstein: I think that’s the key.
Zezas: There’s going to be a lot of people who are going to write to us and be concerned about it.
Epstein: I understand. We could go back a little further and say that the government’s job is to balance taxes. What you want is enough taxes to pay the bills, not so much taxes that you are detrimental to the growth of the economy. We used to have that. About 10 years ago, we had that situation. In fact, we created a surplus. So, what I’m talking about is a tax rate within that range. So, we already know that that tax rate is not damaging to the economy. Why not go back there?
Zezas: Well, given that the statistic, recently, the top 10% of taxpayers pay 50% of the government’s budget.
Epstein: And, I think that’s probably right. And, I would suggest to you as I did the analysis, they probably earned more than 50% of the income in the country. So, there’s a disproportionate share between income and taxes paid.
Zezas: Well, I know we’re going to have opinions from a lot of people on that one and I intend to share them with you. So, now let me take you back to the other side of the economy and let’s talk not about the ultimate consumer and taxpayer, but let’s go back to the business side for a moment. The private equity industry is having some challenges. Where’s it going?
Epstein: It’s very interesting. A lot of my clients are in private equity and I work quite a bit with private equity capital venture firms. They used to have a very clear plan. They know what they want to invest in. They plan to fix those companies and they knew the exit strategy.
Zezas: The idea was that they went into investment with an exit in mind.
Epstein: They knew timing and they knew a valuation amount they had in mind. It’s all changed. The IPO market is dried up. Companies are not going public. So, one of the major outlet for these firms has stopped. They still have strategic investors that they can sell to, but if you only have one channel instead of two, you’re limiting yourself. Therefore, they’re not making the initial investment. So, private equity firms, venture capital guys are thinking long and hard before they make the initial investment because the exit is not as clear.
Zezas: The exit is not there. So, the investment by private equity players has tabled off, I would imagine in the recent economy.
Epstein: It certainly slowed down. Now, I read the other day that the IPO filings are at an all-time record. All-time record.
Zezas: High or low?
Epstein: High, highest since the year 2000. Right now, and the question is how many of those are actually going to be taken public. Is there a demand out there for all the shares that they want to issue, not likely. And, that probably gets into another question that I think we should discuss: Why not? Why aren’t investors putting more money into stocks? I think there’s been a lot of problems in the stock market recently, and we all know investors are shying away from equities and going into bonds, fixed income. There is a lack of certainty about the controls over stock market and therefore valuations. We’ve got a ton of regulation. SEC rules and so on and so forth.
Zezas: No, we don’t have a lot of regulation!
Epstein: We have more than enough regulation. What we don’t have though is effective regulation. I think we need fewer and better regulations.
Zezas: Better and fewer.
Epstein: Better and fewer. I’d love to see them cut down on the number of regulations. However, make sure the ones you keep are effective and enforce them.
Zezas: Yea, that’s been the common concern that there’s so much regulation that it doesn’t get enforced and they regulate the regulators. And, they regulate the regulated.
Epstein: It would give significant confidence to stock market investors, which free up the IPO market, which enable private equity firms to see an exit and therefore invest, maybe even have some people get hired by companies that are growing. So, freeing up regulations, I think would be very supportive.
Zezas: So, it tall ties back. Reduce the amount of regulation, clean up the existing regulation, better enforce the existing regulation, the stock market will likely loosen up. Investors will come back. IPOs may increase in actual execution. Private equity investors will do best and the engine will be fueled.
Epstein: With one provisional. We cannot have no regulation. I think what we did over the last couple of years is saw the effect of no regulation. We need regulation, but it has to be effective, it has to be clear, and it has to be enforced.
Zezas: I couldn’t agree more. We’re almost out of time. Let me ask you one more question. Tie back regulation to corporate governance. We talked about governance from a governmental perspective. Tie it back to corporate governance.
Epstein: I think it’s very closely related. I think that the corporate board of directors and government regulators too often are friends of the family. There’s too many friendships there. There’s a lot of warm bodies filling seats. This also won’t make a lot of friends. But, I think what we need….
Zezas: I hear pitchforks and people with torches.
Epstein: I’m sure they’re sharpening their blades, but I think in both cases, you need people who really want to get the job done who are serious about cleaning things up, maintaining some resemblance of control and logic. It’ll improve the situation. Nobody likes regulation. They’ll be better off with it.
Zezas: Mel, I wish I could disagree with you. I can’t. I think you’re spot on with all your comments. I think this has been phenomenal. I’m so glad that we invited you back for a second interview. I hope you’ll come back for a third and a fourth and I truly appreciate your ideas and time. This is Andrew Zezas for CFOstudio.com with Mel Epstein, financial executive and CFO of M&C Group. Thanks for watching. I look forward to seeing you again.
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