Friday, June 15, 2007

Tax shock for private equity funds (Sydney Morning Herald)

Damian Reece and James Quinn in New York

BLACKSTONE, one of the world's biggest private equity funds, is reeling after its planned $US34 billion stock market flotation was hit by news of a new bill proposed by US politicians that will remove the favourable tax treatment private equity funds receive in the US.

The bill has been put forward by senators Max Baucus and Charles Grassley, the ranking Democrat and Republican respectively in the Finance Committee. It threatens not only the Blackstone float but also other flotations being considered by rival private equity houses such as KKR.

The bill contains a "grandfathering" clause that means Blackstone could float and maintain its current tax status for six years but lose it after that period. However, new private equity flotations coming after Blackstone would not enjoy that privilege and would face a harsher tax treatment immediately. The legislation proposes that private equity funds are taxed as corporations rather than partnerships for federal tax purposes.

Some analysts on Wall Street believe the bill may struggle to see the light of day, as it will need approval from the Finance Committee and the Senate. However, it will send shockwaves through the vast private equity industry on both sides of the Atlantic as it reveals the level of opposition in some quarters to the amount of money that private equity partners are earning.

Investors are thought to have welcomed the planned Blackstone float, showing strong appetite for its shares but this news is bound to temper enthusiasm for Blackstone and other private equity floats until the future tax treatment of private equity is settled. The move by the senators will also give anti-private equity campaigners in the UK more ammunition in their campaign to curb the buyout industry, which has seen some of its own members recently benefit from low levels of capital gains tax.

Some leading private equity players are also under scrutiny in Britain as to where they are domiciled for personal tax purposes.

The furore in the UK claimed its first scalp on Thursday. Peter Linthwaite, chief executive of the British Private Equity and Venture Capital Association, resigned after a grilling from MPs on the Treasury Select Committee.

Senior UK private equity figures are now coming out in support of raising the rate of capital gains tax applied to private equity partners. Duke Street Capital's Peter Taylor became the first active professional to admit publicly that some of the current tax rates it enjoys are "unnecessarily low" and could be higher without unduly harming investment.

Mr Taylor, speaking independently from his role as managing partner of Duke Street, said of the capital gains tax rate of 10 per cent on investments held for just two years: "Personally, and this is my view, not that of Duke Street, I think 10 per cent is unnecessarily low. It could be a little higher than 10 per cent without deterring people. Something in the region of 15-20 per cent would seem fair."

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