If there was any doubt about the arrival of private equity as a hot-button issue in the District of Columbia, take a gander at today’s Congressional scoreboard:
Hearings on the U.S. Attorney Flap: 1
Hearings on Private Equity: 3
Lawmakers in both houses of Congress pored over just about every aspect of the public-slash-political debate over private equity’s place in the nation’s economy. The Senate Finance Committee considered the justice of hiking taxes on PE pros by treating their carried-interest profits as ordinary income rather than capital gains. Meanwhile, the House Financial Services Committee invited testimony on “dark” pools of private capital and whether they pose a systemic risk to the financial markets. And, not to be outdone, the House Oversight Committee heard from a panel that universally agreed that Blackstone and similarly publicly traded partnerships should be assigned more scrutiny by the federal government.
At the Senate hearing, a representative from the Treasury Department, following the lead of Secretary Henry Paulson (ex-Goldman Sachs chief) said Congress should exercise restraint when considering whether to raise the taxes on partnerships that “have worked successfully to promote and support entrepreneurship for many decades.” And Sen. Chuck Schumer, an influential Democrat (and New Yorker whose constituency might be upset about the tax change) came out today opposed to a tax shift that singles out private equity and hedge funds. Throw in real-estate partnerships and oil and gas partnerships, and you might have a winner, however.
The Private Equity Council (which has finally launched a website) was invited to the hearing, although there’s going to be a Part II later this month. The PEC did respond with a white paper demonstrating the PE industry’s contributions to the economy and public pension funds.
Over in the House, Rep. Barney Frank and others fretted about the rapid growth of private pools of money. While these pools provide unprecedented levels of liquidity and risk-sharing, panelists said, hedge funds and buyout funds don’t get much scrutiny and pose risks. For good measure, Frank entered into the record a Moody’s report issued Monday arguing that LBO firms are too quick to take money out of portfolio companies through recaps.
Finally, Rep. Dennis Kucinich (the same one running for president) assembled a distinguished panel including esteemed Columbia Law School Professor John Coffeee, to talk about whether publicly traded hedge funds and private equity firms should abide by the 1940 Investment Company Act. (This is the rule mutual fund managers play by.)
All of the panelists, who included another law professor, a state securities regulator and an investment advisor, advocated for firms such as Blackstone to be placed under some form of the 1940 law. In general, they said that firms such as Blackstone, if they’re going to list publicly, should have standard corporate governance rules such as voting rights and independent board committees to ensure transparency and accountability for retail investors.