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Capitol Hill Takes Aim At Private Equity

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The gravity of Capitol Hill’s attack on private-equity going public is beginning to sink in. The proposed legislation would subject hedge funds and private equity groups—many of which are now structured as pass-through partnership for tax-purposes, allowing the partners to pay the 15% capital gains tax on distributions—to the 35% corporate tax rate if they go public. The bill has bipartisan support in the Senate and the support of key lawmakers in the House. Ominously, the White House has been decidedly quiet on the issue.
Many in Washington doubt that George Bush, who has very rarely vetoed legislation not related to the war in Iraq, would defy leaders of his own party on Capitol Hill to reject legislation they had agree to pass. Support for Bush is already shaky among Capitol Hill Republicans—and Bush is expending a lot of his political capital to push for an immigration reform bill.
“I don’t think Bush wants to further alienate members of his own party by standing up for a tax loophole used to make the ultra-wealthy even wealthier,” a Senate staffer told DealBreaker.
Others agree. “Bush is against raising taxes but this wouldn’t necessarily be a tax hike. No rates get raised. It just applies a different tax treatment to very wealthy folks,” a source close the White House said.
Some hope that Bush’s ties to private equity might encourage the president to veto the legislation. The founder of Blackstone, Steve Schwarzman, has been a major backer of Bush. The two went to Yale, where George Bush was a member of the senior class of Skull & Bones that tapped Schwarzman for membership at the end of his junior year.
But Schwarzman’s lobbying on the issue of private equity taxation has already resulted in a tax-break for partnerships that filed for public offerings before the introduction of the legislation yesterday. The break comes in the form of a five-year moratorium on the new tax treatment and would give Blackstone a competitive advantage over other private equity firms looking at a public offering. Schwarzman may, in fact, be in favor of the legislation now, since it gives him a leg-up on his competitors.
That bit of regulatory arbitrage—or perhaps triage—no doubt looks like a bit of cruel irony to Blackstone’s competitors, many of whom have reportedly been exploring the possibility of going public themselves. In part, it was the news that Blackstone was going public that focused legislative attention on the wealth of private equity—and on it’s tax advantages. (Schwarzman’s extravagant birthday party at the Armory probably didn’t help either.) Many in the industry were happy to let Blackstone take the heat by stepping forward with the first private equity public offering. Now it looks like Blackstone has carved out for itself a nice—if temporary—exemption from the tax changes. Fortune favors the bold, as a well-known Florentine used to say.
Even with the phase-in for Blackstone, commentators are estimating that the bill could shave 15 percent to 20 percent of Blackstone’s valuation. Jenny Anderson and Andrew Ross Sorkin at the New York Times estimate that it could cost reduce the firm’s net earnings by “as much as $250 million” on annual basis. Lawmakers on Capitol Hill have singled out Blackstone as the inspiration for the proposed legislation. Mary Gordon for the Associated Press says that the change would double Blackstone's tax burden.
Text of the Senate Bill [pdf]
Finance Committee Description of the Bill [pdf]
Press Release from Committee [pdf]
Tax Boost Sought For Buyout Firms Planning IPOs [Wall Street Journal]
Bill Would Raise Taxes on Public Equity Firms [New York Times]
Blackstone's Tax Burden Could Double [Associated Press via Houston Chronicle]