Friday Letter A cost of doing business

As details emerge of how much one US private equity firm has spent in the first six months of the year lobbying its cause before the legislators in Washington, buyout groups in Europe and elsewhere also need to be thinking how best to educate and communicate.  

US buyout heavyweight The Blackstone Group has ramped up its lobbying spend to an unprecedented level.  As US legislators consider raising taxes on carry and publicly traded partnerships, Blackstone has drastically increased its spending on tax lobbyists this year, paying out $3.7 million in the first half of 2007.

The number is emphatic evidence of how seriously the firm views the threat of heavy-handed regulation. In its first earnings update as a publicly-listed company, Blackstone reported a tripling of revenues and net income. And Tony James, the firm’s chief operating officer, was optimistic about the firm’s prospects on the analysts’ call, despite tightening credit and volatile equity markets. But significant tax increases remain a dark cloud on the horizon and the firm is leaving nothing to chance where it can influence events.

Blackstone has doubled its team of tax lobbyists and increased spending with its lobbying firm by more than 3,000 percent, according to mid-year disclosure reports filed by lobbyists with Congress this week. Its relationship with Ogilvy Government Relations is far from new (it is more than a decade old), but $3.74 million of fees in six months suggests it has intensified considerably.

Ogilvy billed Blackstone a mere $120,000 in the first six months of 2006.

It is the so-called Blackstone bill – co-authored by Charles Grassley and Max Baucus, the ranking Republican and Democrat members of the Senate Finance Committee – which is the focus of Blackstone’s efforts. This bill would cause publicly traded partnerships that receive income from asset management or investment advisory services to be taxed at a higher, corporate rate.

Tax is also exercising minds and starting to lighten wallets across the Atlantic. The British Private Equity and Venture Capital Association has signalled its determination to bring in a heavyweight replacement for former chief executive Peter Linthwaite by reportedly trebling the salary on offer to the successful candidate.

The Financial Times said the UK trade body is willing to pay its new chief executive an annual salary of £350,000 (€515,485; $700,147). This may seem a drop in the ocean compared with Blackstone’s spend on Capitol Hill but it is nonetheless a significant upping of the ante.

The appointment will likely be too late to influence Alastair Darling, the UK’s chancellor of the exchequer currently reviewing the tax treatment of the private equity industry. The current signs however seem good and the UK government looks set on a measured increase in the capital gains tax rate, rather than risking anything more swingeing.

Yet complacency is the worst possible mindset to adopt now – the recent mauling of the BVCA by the parliamentary committee is hopefully reminder enough that politicians should never be underestimated, nor be regarded as fixed in purpose. The game has changed fundamentally and the industry on both sides of the Atlantic needs to be investing both time and money to ensure it is properly understood – and treated.

It won’t be cheap, but it will be worth every penny.