The Blackstone Group has abandoned plans to book its profits at the time of deal close, according to the massive S-1 amendment it filed yesterday. And the entire buyout industry breathes a sigh of relief.
It’s not that the plan was considered illegal (it wasn’t), but rather that it opened up an enormous can of worms related to the private equity taxation issue. A number of other firms also are adopting various versions of fair value accounting – some more liberally than others – but Blackstone’s treatment of carried interest as up-front profit arguably put it in the realm of ordinary income. And ordinary income, as we all know by now, is treated a bit differently by the IRS than is capital gains.
Had Blackstone regularly reported carried interest as instant gains with the SEC, then it would have been just one more quiver in the bow of those who feel private equity investors are exploiting a tax loophole. The Financial Times writes that the firm’s change in strategy occurred because “investment bank analysts involved in the IPO made clear that it was too complex.” Maybe, but perhaps Blackstone also realized that it was shooting its own interests in the foot.