Mumbai:
A fierce campaign in Washington against the perceived
excesses of America''s cash-rich private equity industry
as it buys out company after company has thrown the planned
$33 billion flotation of Blackstone Group LP into doubt.
Blackstone,
which is preparing to go public later this month, said
the proposed US senate legislation on the taxation of
private equity firms could materially reduce earnings
and lower the partnership''s value.
The
big private equity firm expressed its concern a day after
the leaders of the senate finance committee proposed a
bill to tax private equity firms that go public like corporations,
potentially more than doubling their effective tax rate
to 35 per cent from 15 per cent.
Legislators
say it is unacceptable for the firm to remain a partnership
after a flotation and maintain its tax benefits. "It''s
unfair to allow a publicly traded company to act like
a company but not pay corporate tax, contrary to the intent
of the tax code," said Chuck Grassley, a high ranking
Republican member of the Senate finance committee
Grassley
has joined forces with his Democrat counterpart, Max Baucus,
to draw up legislation closing this loophole.
Experts
say Blackstone may have to delay its public offering,
as the backlash against the industry''s excesses continues
on both sides of the Atlantic. And, even if it finally
comes out with a share offer, it would have to re-price
its $31-a-share because of a bipartisan measure proposed
by Republican and Democratic senators which would close
tax exemption to its investors.
But
unlike other investment firms, private equity companies
are structured as partnerships - allowing investors to
pay capital gains tax of only 15 per cent rather than
the usual 35 per cent.
Legislators
are targeting to fill this loophole in tax laws, edged
on by unions and civil rights leaders like Jesse Jackson.
Blackstone''s
senior executives, led by the billionaire Stephen Schwarzman,
however, have failed to set a good example either in diversity
or in personal and wealth management.
The
Blackstone empire has $88 billion of funds under management
and owns businesses including Madame Tussauds, United
Biscuits and Orangina.
UK
industry had invited criticism from MPs on the Treasury
select committee who accused private equity bosses of
failing to pay tax in line with Britain''s "progressive
tax system". Hours after the meeting the industry''s
trade body, the British Private Equity and Venture Capital
Association, announced the resignation of its chief executive
and a wholesale review of its activities.
A
backlash by smaller venture capital businesses keen to
keep their preferential tax treatment led to a split in
the European private equity trade body, EVCA, which distanced
itself from the larger firms, including Blackstone.
There
would now be three separate representations for the larger
and more controversial private equity firms, the mid-sized
firms and the smaller funds.
Although
Blackstone would get five years'' grace before the changes
take effect, the uncertainty could hit the company''s valuation.
News
reports have done more damage to the reputation of the
buy-out firms and their bosses. Blackstone''s boss Steve
Schwarzman earned $398 million last year and has thrown
a series of star-studded Manhattan parties. The Wall
Street Journal reported that he has a taste for $400
stone crabs and has ordered his servants not to wear rubber-soled
shoes because they squeak too much.
"Schwarzman
should not be paying lower taxes than a firefighter,"
said Damon Silvers, associate general counsel of the AFL-CIO
union federation:
In
the UK, the GMB union, which is spearheading a campaign
against the excesses of the private equity industry, urged
Gordon Brown to adopt a similar tax policy.
The
GMB has selected eight private equity bosses, including
Damon Buffini of Permira, owner of the AA and Birds Eye,
and Guy Hands of Terra Firma, to appear on metre-high
colour posters in a "rogues gallery" that will
parade around the festival site at Glastonbury next week,
where the expected 175,000 revellers will be allowed to
vote for the "worst rogue" in the industry.
Private
equity have some defenders who say it was different to
other money management enterprises because of the degree
of risk to which founders staked their own capital. They
also fear that such a legislation could weaken the New
York Stock Exchange''s attempts to compete in a global
market for flotations.
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