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The Blackstone Bill

Update from Romney spokesman: “Governor Romney is opposed to increasing taxes. He believes the folks in
Washington, DC should instead be focused on cutting wasteful spending.”

There have been two groups of private equity pros over the past few months: Those who believe Congress is serious about changing tax treatment, and those who think it’s an academic exercise being conducted by low-level Senatorial staffers in search of extra government revenue. If there is still anyone left in that second group, please sit over in the corner with those who still think O.J. didn’t do it.

Senate Finance Committee Chairman Max Baucus (D-MT) and ranking minority member Chuck Grassley (R-IA) yesterday introduced legislation that would require private equity firms to pay taxes as corporations (35% rate) rather than as partnerships (15% capital gains rate), when selling shares to the public. Now whoever could this be aimed at? Is there a big-name private equity firm out there looking to go public?

Of course there is, and I nearly laughed when Senate Finance Committee spokeswoman Carol Guthrie told me last night that the legislation is “not aimed at any one particular vehicle, but is instead intended to address a trend.” Come on. This is the Blackstone Bill, and to pretend otherwise is absurd.

But Blackstone did get at least one bouquet, in that the bill includes a five-year grace period for partnerships that either: (A) Already are publicly-traded, or (B) Have registered to go public by June 14. Some reports this was the result of Blackstone’s lobbying efforts, which means it’s doing some work outside of the recently-formed Private Equity Council (whose other public-leaning members would be penalized by the June 14 date).

I’m already on record as saying that this bill – if ratified — is unlikely to kill the Blackstone IPO, although it could cause a slight delay. But the more I think about it, I wonder if death has a slightly greater chance of occurring. A public Blackstone could have serious trouble attracting junior talent in what already is a tight labor market, given that these folks would eventually see their carry taxed twice as high as if they took a similar job elsewhere. Plus, it could heighten inequity concerns among current Blackstone employees, who could feel left in the lurch in order that their leaders gain immediate liquidity. And, as I said this morning on CNBC, Schwarzman certainly wants his billions, but he also wants a sustainable legacy.

Two final notes, before moving on to other business: (1) Don’t be surprised if this is simply a precursor to bills that affect private partnerships by changing the treatment of carried interest from ordinary income to capital gains. (2) Expect that current presidential candidates will be forced to voice opinions on this bill in short order. I can guess where Romney stands, which likely means he’ll increase his financial edge among private equity contributors.

Go here for the full text of the legislation.  

You can read Sen. Baucus’ statement of introduction here: Baucus_Statement.pdf

You can read Sen. Grassley’s statement of introduction here: Grassley_Statement.pdf