June 16, 2007
Oaktree Capital: The Other PE PTP?
Posted by Victor Fleischer

The Blackstone Amendment stirred a lot of press coverage (see Paul Caron for all the links); I'm quoted in the NYT and WSJ today.  

What about Oaktree?  Most of the attention has been on Fortress and Blackstone.  But I suspect the legislation also affects Oaktree Capital, an investment management company based in LA.  Oaktree has about $40B assets under management, about half the size of Blackstone.  In a recent deal that bears many similarities to Blackstone, Oaktree sold about 15% of itself to institutional investors in a quasi-public offering.  The twist is that only a limited number of accredited investors can buy the shares, and they can only trade their shares through a portal managed by Goldman Sachs called GSTrue (Goldman Sachs Tradable Unregistered Equity).  (See the WSJ stories here and here.)  The idea is to get (most of) the liquidity of the Blackstone structure without the hassle of securities regulation that weighs on public companies.  

Brother, can you spare an offering memo?  I'm working at a bit of an informational disadvantage here, since I don't have an offering memo.  So I don't know exactly how the Oaktree structure works, or, for that matter, how Goldman's portal works; rather, I'm guessing based on the information in news reports.  Such are the challenges of academic research on private equity.

The PTP Rules.  With that caveat, it's hard to see why Oaktree wouldn't be affected by the Blackstone Amendment.  The PTP (publicly-traded partnership) rules affect both (1) companies that trade on established securities markets and (2) those that are readily tradable on secondary markets.  Surely Goldman's GSTrUE market counts as a secondary market.  And I would imagine that Oaktree is relying on the "qualifying income" exception to the PTP rules.  The new legislation, introduced Thursday by the Senate Finance Committee, would prohibit firms like Oaktree from relying on that "qualifying income" exception, and as a result, one would expect Oaktree's quasi-public partnership to get pulled in to the world of corporate taxation by Blackstone's undertow. 

Like Fortress and Blackstone, Oaktree would get five years of transition relief.  Oaktree was rushing to beat Blackstone to market.  I'm sure they are glad they did.  Five years of avoiding corporate tax is better than none. 

The future of quasi-public entities.  None of this heralds the end of the blurred public/private entity distinction.  There are broader forces at work (see generally Ribstein, and this recent paper by Ron Gilson & Chuck Whitehead).  But the Baucus-Grassley bill does signal that tax policy will not remain neutral on this topic; if you want to access our public (or quasi-public) equity markets, you must pay the corporate tax.  In light of how the capital markets have developed, whether that tax policy is sustainable in the long run is debatable. This isn't to say that the Baucus-Grassley bill is a bad idea.  So long as we have a corporate tax, we might as well police the rules.  The Baucus-Grassley bill is a sensible first step on the way to re-examining the taxation of carry (i.e. labor income vs. capital income) and the normative justification for the corporate tax (i.e. corporate tax vs. partnership tax).  Those topics may take years to resolve. 

Comments are closed as Miranda and I pack up to join the Bloggiest Law School Ever.  I welcome comments (and offering memoranda) at victor.fleischer (at) gmail.com.

Related Posts:

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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