Private Equity Council will oppose legislation that discourages U.S. PE firms from going public
WASHINGTON, DC, June 21, 2007 —
The Private Equity Council today announced its opposition to legislation introduced last week by Sens. Max Baucus (D-Montana) and Charles Grassley (R-Iowa) that would discourage U.S. private equity firms from offering shares to the public and in the process undermine U.S. financial competitiveness.
“After studying the bill, we have concluded that the Baucus-Grassley legislation, by significantly raising taxes on U.S. private equity firms that seek to offer shares to the public, will discourage them from tapping into the most robust capital market in the world — the United States,” said Private Equity Council President Douglas Lowenstein. “That means that U.S. firms will be put at a competitive disadvantage to overseas firms that can manage investment funds at a lower overall tax cost,” Lowenstein added.
“Congress should not inadvertently create an uneven international playing field for an industry that serves such an important function in the American economy — strengthening portfolio companies and delivering superior returns to public and private pension funds, charitable foundations, university endowments and other investors,” he said.
That said, we understand the broader concern about protecting the tax base and to the extent this is a concern, we prefer to work with the committees on a solution that addresses the issue in its entirety, rather than in one industry sector,” he added.
Private equity firms, which act as general partners, raise capital from limited partner investors — more than a third of which are pension funds, charitable foundations and university endowments — with the goal of acquiring companies, improving their performance and selling the companies for a profit. Generally, 80 percent of the profits realized upon the sale are distributed to the limited partner investors.
Between 1991 and 2005, private equity firms around the world distributed more than $430 billion in profits to their investors. Pension funds, foundations and endowments typically invest in private equity funds because they deliver returns far greater than the investors could achieve in public equity markets.
In addition to expressing concerns about the bill’s impact on capital access, the PEC also objects to singling out private equity partnerships for less favorable tax treatment than other publicly-traded partnerships.
“Income from private equity investments is no less qualified for this tax treatment than the income that flows to partnerships that own apartment buildings, mine for minerals or refine, market and distribute propane and other petroleum products,” Lowenstein said. In fact, just days after introducing the bill targeting private equity, the Senate Finance Committee approved legislation expanding tax benefits for publicly-traded partnerships in the energy and alternative fuels industries, Lowenstein noted.
“This proposal would, in effect, create a ‘triple tax’ for private equity firms that decide to go public,” Lowenstein continued. Today, portfolio companies owned by private equity firms pay regular corporate tax on their income. When the companies pay dividends or when the businesses are sold and profits are distributed, the private equity owners pay another tax. “This proposed legislation would add a third layer of tax to the same income stream,” Lowenstein said.
The fear that the corporate tax base will erode without legislation is unsubstantiated, Lowenstein added. Major financial institutions are unlikely to abandon their status as publicly-traded corporations to become publicly-traded partnerships because they would be faced with monumental tax payments that would serve as a powerful deterrent to converting to a publicly-traded partnership.
“We understand and respect the concerns that gave rise to this proposal and we are grateful that the bi-partisan leadership of both the Senate Finance Committee and the House Ways and Means Committee is committed to holding hearings on it. We look forward to a constructive dialogue with them as the legislative process proceeds,” Lowenstein added.
About The Private Equity Council
The Private Equity Council, based in Washington DC, is an advocacy, communications and research organization that develops, analyzes and distributes information about the domestic and international private equity industry. Its members are: Apax Partners; Apollo Advisors; Bain Capital; The Blackstone Group; The Carlyle Group; Kohlberg, Kravis & Roberts; Hellman & Friedman; T.H. Lee Company; Providence Equity; Silver Lake Partners and TPG Capital.
