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Blackstone IPO Faces Roadblock In Senate

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.

Last year, Blackstone announced $102 billion worth of deals, more than any other buyout firm, according to Thomson Financial. Private-equity firms pool money from super-wealthy individuals and institutions, buy entire companies, and then attempt to turn them around and sell them at a profit.

Blackstone had long touted the benefits of being a private firm -- chief executives of private companies do not have to worry about quarterly results or comply with complicated securities laws such as the Sarbanes-Oxley Act.

So why would the king of private buyouts go public? Analysts say the reason is simple: The partners of the firm wanted to put a dollar value on the business they created, which in turn would put massive amounts of cash in their pockets.

Schwarzman, 60, would be able to cash out as much as $677 million and hold stock worth more than $7.5 billion. Co-founder Peter G. Peterson, 80, would get $1.88 billion in cash and hold a stake valued at $1.3 billion.

The IPO filing, which revealed those payouts and the firm's effort to avoid taxes, put Blackstone in the crosshairs of several groups that represent workers.

"Steve Schwarzman should not be paying lower taxes than a firefighter," said Damon A. Silvers, associate general counsel of the AFL-CIO, which wants the SEC to delay the IPO. "We do believe that tax policy should not redistribute wealth in favor of the wealthiest people."

Finding ways to reduce tax bills is nothing new in corporate America, nor is it illegal. But some analysts say Blackstone is taking the practice to a new level. Profits from its private-equity funds would be directed to its partners, who pay a 15 percent capital-gains tax. Meanwhile, Blackstone's management fees, which make up half its income, would be channeled to a subsidiary so that the parent company can keep its partnership status, analysts of the IPO filing said.

Schwarzman, who was receiving a leadership award in New York from the Yale Chief Executive Leadership Institute as the Senate bill was announced, told the audience: "We're having an interesting time with this IPO," Bloomberg News reported. "There is some concern in Congress that this is not an ideal thing for companies like us to do."

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