Heavyweights weigh in on PE(2)

Private equity dominated discussions in the US this week, as high-ranking government officials, superstar investors and senior executives commented on the building tax controversy confronting the industry, as well as the longevity of the so-called buyout boom.

Differing opinions on private equity’s endurance and on proposed US tax changes aimed at the industry were offered this week by influential individuals, including past and present chairmen of the Securities and Exchange Commission, the US Treasury Secretary and a number of billionaire investors and private equity executives.

SEC Chairman Christopher Cox on Monday told the House Financial Services Committee that the SEC finds recently introduced bills targeting private equity “concerning”, AFX reported.

Cox said he would “urge Congress to consider capital formation” as they examine legislation such as the Baucus-Grassley Bill, which proposes to increase taxes on publicly traded partnerships, and the bill introduced by House Representative Sander Levin, which would tax carried interest as ordinary income at 35 percent, rather than the 15 percent capital gains rate.

The tax topic was a recurring theme at a Wall Street Journal conference in New York Wednesday.

Among those seemingly opposed to Congress’ recent take on the tax issue were US Treasury Secretary Henry Paulson, the former head of Goldman Sachs, and Glenn Hubbard, dean of Columbia Business School and a former economic advisor to the Bush administration.

“I don’t believe it makes sense to single out one industry,” Paulson said at the conference. “I think the reason we have a [corporate tax code] system as complex as it is, is we have tended to single out industries, companies, or respond to the pressures of the moment.”

Partnerships are “a great structure to promote risk-taking, entrepreneurial spirit,” he said. “I really do think we need to be careful about dealing like something with this piecemeal [and, as a result, create ] unintended consequences.”

Hubbard warned that “the last time we tried to personalize the tax code we got the AMT”, or the Alternative Minimum Tax Act, which was meant to tax a couple hundred wealthy citizens and eventually affected millions of Americans.

The continued endurance of the private equity boom was also a central topic at the conference. Many of those in attendance were reportedly optimistic that the industry has not reached the top of the market, including Goldman Sachs CEO Lloyd Blankfein; Silver Lake co-founder Glenn Hutchins; Ripplewood Holdings CEO Tim Collins; and Richard Breeden, head of Breeden Capital Management and former SEC chairman. Most admitted they do expect some bumps in the road, however.

Bain Capital managing director Mark Nunnelly used a baseball analogy to summarise his view: “This is not a 7th inning broadcast, but a 2nd inning broadcast,” the Journal reported.

Billionaire corporate raider and private equity investor Carl Icahn, however, said shareholder demands for higher prices from buyout firms have caused the buyout boom to plateau, Associated Press reported.

 “For years private equity has had a walk in the park,” he said. “I think it’s peaked. But, I don’t mean these guys won’t make money.”

Individuals running private equity firms “aren’t stupid, and that’s the reason to monetise,” he said, presumably in reference to firms like The Blackstone Group, which have gone – or are considering going – public to create new pools of capital. Ironically, Icahn admitted to having tried unsuccessfully to short the Blackstone stock after its IPO, according to blog DealBreaker.com.

At a Thursday fundraiser in New York for Senator Hillary Clinton, billionaire investor and frequent private equity critic Warren Buffett threw in his two cents on the tax debate, criticising the current scheme, according to UK newspaper The Times.

“The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter”, he told the attendees, each of whom paid $4,600 to attend the fundraiser. “If you’re in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.”

Buffett reportedly told the crowd his $46 million in earnings last year was taxed at 17.7 percent, while the $60,000 his secretary earned was taxed at 30 percent.

The high level of interest in private equity-related taxes is likely to continue, as US legislators hold hearings on the matter this summer and lobbyists and industry groups join forces to fight the proposed legislation. This week saw the advent of the Coalition for the Freedom of American Investors and Retirees, a group of some 70 lobbyists opposed to the proposed tax legislation, the Journal reported.