Write-Offs: 6.15.07
Private Equity & Taxes: Special Edition

taxesprivateequityblackstone.bmpThe move to raise taxes on private equity firms going public is the bill the launched a thousand headlines. And ten-thousand blog posts. This afternoon we looked at the possibility of the bill getting enacted and answered the most fundamental question about the proposal. We’re going to send you away into the weekend with an extended write-offs section dedicated to private equity and taxes.
Private Equity, Meet Politics
Here’s the text of the bill [US Senate: pdf]
The official explanation from the finance committee says the bill is meant to address the ‘erosion of the tax base.’ [US Senate: pdf]
Holman Jenkins says the real purpose of the bill is to address the lack of political contributions coming into Washington, DC from private equity pooh-bahs. [Wall Street Journal]
And that explains why Blackstone gets the five-year break: because he’s playing the game the way the Senators and lobbying industry want him to. Membership has its privileges. [Ideoblog]
If Blackstone did buy themselves a break from the Senate, they did it on the cheap. Blackstone employees have only given $26,100 in campaign donations to members of the finance committee over the past 17 years. [Deal Journal]
Senator Grassley thinks that access to US capital markets should be contingent on paying the corporate tax. [Finance Committee Press Release: pdf]
Jenny Anderson and Andrew Ross Sorkin say the bill is going to be called The Blackstone Bill. Which is ironic, since the Blackstone Loophole may exempt Chez Schwarzman for five years. [New York Times]
Meanwhile, Blackstone itself is probably prohibited to publicly responding to any of this because it is in a pre-IPO quiet period. [Associated Press via Houston Chronicle]
The Costs
Mary Gordon says Blackstone’s tax bill could double. [Associated Press via Forbes]
And, of course, the higher tax bill may chill the appetite for going public at other private equity firms. [DealBook]
DealBreaker Commenters notice the irony that taxing the public company at the corporate rate means private equity firms in which ordinary shareholders can invest face a bigger tax burden than private equity firms open only to wealthy investors. Sticking it to the little guy!
Details: Human Interest and Otherwise
Before news of the tax hit came yesterday, Schwarzman and other ‘stoners were pitching the company’s IPO to a standing-room-only crowd of about 600 investors at the Pierre Hotel. [Bloomberg]
When the news broke, Schwarzman was at the NYSE exchange getting an award from Yale. [Washington Post]
Schwarzman described the news of the bill as “a crisis.” [Wall Street Journal]
The Man Behind The Plan: Meet Victor Fleischer
The academic who is advising the Finance Committee on the tax treatment of private equity firms says the Blackstone IPO represents ‘2 and 20 on drugs.’[The Conglomerate]
And, yeah, he thinks the ‘carried interest’ capital gains break for fund managers should be brought to an end, too. [The Conglomerate]
But he also explains an even more twisted way that ordinary income tax could be avoided. [The Conglomerate]
Early Reactions
Percy Walker says he doubts the changes will ever reach down to tag fund managers individually. [Percy Walker.com]
Felix Salmon thinks that’s wishful thinking. All the tax loopholes are going to be closed soon, even the ability to move funds off-shore. Especially if the Democrats take the White House. [Portfolio]
Meta
The deal team at the Wall Street Journal gets all ‘war correspondent’ on us. Broadsides. Shots across the bow. Private equity bracing for an attack. (Also, we count no less than seven Wall Street Journal reporters attached to this one story. Talk about sending in the cavalry.) [Wall Street Journal]
News from Around the World
British parliament rips into venture capitalists on why they pay 10% capital gains tax instead of income taxes on the earnings of their partnerships. [Epicurean Dealmaker]
The grandfather clause and other fun stuff
Steve Schwarzman became a grandfather of twins yesterday. [DealBook]
Suggested ring-tones for Schwarzman. [Deal Journal]

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Comments (14)

  1. Posted by marcus halberstam | June 16, 2007 at 2:03 PM

    Private Equity firms, which take companies private, are going public? I’ll never understand this.
    Also, as soon as congress knows enough about something to try and tax it the money-making days are over. The dumb money moves in and the smart money has already moved on.

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