Blackstone IPO Faces Roadblock In Senate

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By David Cho
Washington Post Staff Writer
Friday, June 15, 2007

Two key senators took aim at the initial public offering of Blackstone Group yesterday, introducing legislation that would foil a major tax advantage that the private-equity giant hopes to benefit from as a public company.

The proposal has the potential to delay or even derail Blackstone's IPO less than two weeks before it was to launch. As one of the most anticipated market events of the year, the offering would give Blackstone a $33 billion market value and shower its top executives with billions of dollars worth of stock and hundreds of millions in cash.

The legislation by Senate Finance Committee Chairman Max Baucus (D-Mont.) and Sen. Charles E. Grassley (R-Iowa), the committee's ranking minority member, signaled a growing concern in Congress that private buyout shops taking over huge swaths of industry pay too little in taxes. Lawmakers rarely interfere with an individual firm's plans to go public.

Blackstone filed to go public as a limited partnership in March, taking advantage of an obscure tax provision that would allow it to pay the 15 percent tax rate on capital gains rather than the 35 percent corporate rate.

Publicly traded partnerships are rare, especially in the financial sector. The senators expressed concern that Blackstone's offering would set a dangerous precedent and lead to a wave of financial firms reorganizing themselves to take advantage of the tax loophole.

"Right now, some businesses are crossing the line between reasonably lowering their tax burden and pretending to be something they're not to avoid most, if not all, corporate taxes," Grassley said. "If left unaddressed, the tax concerns presented by the public offerings of investment managers, like private-equity and hedge fund management firms, could fundamentally erode the corporate tax base. That would leave other individuals and business taxpayers with a greater share of the nation's tax burden."

The proposed legislation would force private-equity and other financial firms to pay taxes as corporations instead of as partnerships when they sell shares to the public.

The bill gathered momentum yesterday when House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.) expressed support and said his committee would take up the issue.

The legislation would give Blackstone a five-year grace period before it would have to pay the 35 percent tax rate, because it has already filed a request to go public with the Securities and Exchange Commission. But other private-equity firms that had been considering an IPO, such as Carlyle Group and Apollo Management, would be taxed at the 35 percent rate if they decided to go public.

As they prepare for debate on the bill, Grassley and Baucus asked the Treasury Department to examine tax law to clarify the intent behind the partnership provision and whether Blackstone complies. They also sent a letter to the SEC that hinted at the need for a delay in approving Blackstone's IPO. "Investors and shareholders will be in a more informed position after Congress and the Treasury have had an opportunity to speak to the serious tax policy questions raised by the Blackstone IPO," they wrote.

Blackstone, which is in an SEC-imposed quiet period, declined comment through its spokesman, John A. Ford.

As the nation's largest buyout firm, Blackstone is a focal point in a debate over the growing clout of private-equity firms, with its big deals, high executive compensation and lavish New York parties thrown by its chief executive, Stephen A. Schwarzman.


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