Some Taxing Math

Just how much more money would the government make in revenues if some lawmakers get their way with a tax hike on publicly-traded private equity firms and their partners? How would it affect shareholders? Would private equity firms stop going public? Who would really suffer from such a change--private equity partners, the government, shareholders, taxpayers, or all of the above?

These are all questions that are helping private equity lobbyists in Washington earn their keep these days.

The latest word, but certainly far from the last, comes from Blackstone Group. In a letter to Senator John Kerry, who requested information on how proposed tax legislation from Senators Max Baucus and Charles Grassley would impact it, Blackstone attempts to answer some of those questions.

Bloomberg News got a hold of the letter, and it raises more questions than it answers.

Blackstone says that the Baucus-Grassley bill, which would require private equity firms to be taxed as corporations instead of as partnerships, would increase their annual bill from the I.R.S. by $525 million, or triple what it pays now. The bigger tax payment would depress Blackstone's bottom line as well as its share price, which would result in its partners paying Uncle Sam about $175 million less in individual taxes. So the additional net income for the government, using Blackstone lobbyists' calculators, would be $350 million.

While that might sound like chump change to the government, Blackstone's "If-this-bill-passes" doomsday picture doesn't stop there.

What about all that capital gains tax that shareholders pay when they make money from investing in Blackstone's stock? Gone. Blackstone "claims that the tax increase would depress earnings and erase as much as $10.5 billion of the firm's $25 billion market value." That's a 42 percent drop in share price.

But in an August 1 research note on Blackstone published by Wachovia analyst Douglas Sipkin, management didn't paint such a scary scenario when they were selling the deal to the Street. In discussing the impact of the tax proposal, Sipkin writes that "management indicated that discounting the incremental differential from changes in tax rates would decrease BX's value by about $2.50-$2.70 per common unit." At the time, the common unit was $24.01. That's about an 11 percent drop in share price.

And let's not forget that the government has seen very little in the way of capital gains revenue from Blackstone's public shareholders so far. Blackstone shares currently trade about 20 percent below their June I.P.O. price.

Moreover, the Blackstone letter claims, the Baucus-Grassley bill "would actually result in a significant net loss of tax revenues by dramatically decreasing the number of firms willing to access the public markets."

Blackstone's dismal market performance notwithstanding, it appears private equity firms have plenty of reasons to forgo I.P.O.s in today's market that have nothing to do with proposed tax changes. Rumors of Kohlberg Kravis & Roberts pulling its I.P.O. are swirling, although the firm has denied it.

Indeed, about the only thing we know about the true economic impact of this proposed tax legislation and the fate of the private equity industry in general is that uncertainty prevails.

That, and the fact that we haven't heard the last from the private equity lobby.

by Megan Barnett