June 24, 2007
Wow, did I pick the wrong week to move. Blackstone went public, KKR is rumored to do the same, the Baucus-Grassley PTP amendment gathered momentum, Blackstone may lose its 5 year transition relief, and then the big one -- on Friday some House Dems introduced a bill that would tax carried interest at ordinary income rates. Busy week. I discovered that it's awfully tough to find a public wifi connection in the middle of Missouri (I was hoping to read the text of the House bill before close of business Friday). Highlight of the trip was talking to a British reporter about the Blackstone IPO from a McDonald's in Macon, Missouri. I managed not to ask the cashier what her tax rate is, fearing it might be higher than the Blackstone guys.
A few quick thoughts about Blackstone and the new bill.
1. What Blackstone's "poplet" means. Blackstone closed its first day of trading about 13% above its IPO sale price, a modest pop. But this almost certainly would have been higher if the Baucus-Grassley amendment hadn't gathered momentum and House Dems hadn't introduced new legislation. All things considered, a successful IPO, and a good day for Blackstone.
2. The Blackstone IPO is not the new Netscape IPO. Some folks are comparing the Blackstone IPO to the Netscape IPO - an indication both of a new bubbly era on Wall Street (then, a dot com era, now, a private equity era) and a loss of investor rationality. But I think the better comparison is to that of Goldman Sachs back in 1999. Goldman Sachs had been a partnership for a long time, and it was surprising to see Goldman go public. But GS has thrived since then. Similarly, Blackstone is becoming a mature, diversified, financial services firm, and its IPO makes sense for a lot of reasons, including acquiring a base of permanent capital for growth and shares for acquisition currency, as well as providing some liquidity to the founders and managing directors.
3. Taxes are a small issue. Senator Baucus suggested this week that he's open to the idea of shortening the transition relief period for Blackstone (and Fortress and Oaktree). And of course if the House Bill passes Blackstone would pay 35% on its carried interest allocations. But Goldman Sachs has done just fine despite paying tax at a 35% corporate rate. Blackstone will be okay too -- the tax hike just takes a little froth out of the cappuccino. The fact that Blackstone completed a successful IPO in the midst of all of this shows that the real forces driving private equity returns go way beyond tax.
4. The House Bill seems rushed. I still need to sit down and read the legislative text carefully, so I'll save my nits for later in the week. Naturally, I'm pleased that someone has introduced legislation on the broader taxation of carried interest issue, but I'd been hoping that it would emerge first as a bipartisan bill from Senate Finance before being formally introduced in the House. I don't see this as a class warfare issue, and I hope it doesn't become that. To be sure, in an era of rising inequality, watching the richest pay tax at 15% doesn't make much sense. But the longer we can keep the focus on good tax policy, the better.
5. "We Pay Less in Taxes Than Our Janitors." To defuse the class warfare issue, PE fund managers need a soundbite that works - the "private equity pays less tax than the cleaners" soundbite is killing PE in Britain, and it will really hurt them in the US too. Just as the civil liberties crowd is always hurt by the "Constitution is Not a Suicide Pact" line, PE needs to find a soundbite that works, and fast. Suggestions welcome in the comments. Nominations include "Assault on the Investor Class" (WSJ op ed), and "This Year's Man Behind the Tree" (Holman Jenkins). Anti-PE slogans are more fun, like "You Don't Know What a Few Extra Decimal Places Taste Like" (Return of the Player, via Percy Walker), Subsidizing the Barbarians at the Gate, or And You Thought CEOs Were Rich.
Related Posts:
Oaktree Capital: The Other PE PTP?
The Blackstone Amendment to the PTP Rules
The Blackstone IPO: Two and Twenty on Drugs
AFL-CIO vs. Blackstone
Reuters and Bloomberg on Blackstone's Tax Structure
The Politics of Taxing Blackstone
Blackstone IPO: Analysis of the Tax Risk
The Blackstone IPO: Regulatory Arbitrage Extraordinaire
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1. Posted by 2L on June 24, 2007 @ 16:19 | Permalink
new PE soundbite suggestion:
"Shouldn't janitors, you, and I all pay tax at 15%? Call your local Congressman."
2. Posted by M. Hodak on June 24, 2007 @ 18:13 | Permalink
Why do people still think of a "pop" as a sign of a good IPO? It confounds economic sense.
I second 2L's suggestion, quixotic as it seems.
3. Posted by Jake on June 24, 2007 @ 19:18 | Permalink
Sure, it would be better if everyone paid tax at 15% rather than 35%.
Now the harder question -- 15% of WHAT?
