Private Equity Funds Bulk Up

Threat of Senate Action Spurs Torrent Of Lobby Hires

Posted June 19, 2007 at 6:45pm



Correction Appended

Private equity giant Blackstone Group is facing a big mess on Capitol Hill. But it’s not facing it alone.

The firm, in the midst of going public, is grappling with the dubious distinction of a proposed tax in its name. The Blackstone bill, as it has been dubbed, would boost by 20 percent the tax rate on the profits of private funds that take themselves public.

Senate Finance Chairman Max Baucus (D-Mont.) and ranking member Chuck Grassley (R-Iowa) shocked many in the industry when they dropped the bill late last week, following a run of press coverage depicting Blackstone co-founder Stephen Schwarzman’s lavish lifestyle. And while Blackstone officials are staying silent about the proposal until their stock hits the market, sources familiar with the situation confirmed the fund already has assembled a tight-knit and potentially expanding team of lobbyists to help them deal with their burgeoning Hill problems.

The firm for two years has relied on a Republican-heavy lineup at Ogilvy Government Relations, steadily adding individual lobbyists there to the contract. Two months ago, they beefed up their reach with the majority party by subcontracting a deal, through Ogilvy, with the all-Democratic shop Parven Pomper Schuyler, which includes former Baucus aide Brian Pomper.

Even more recently, as Congressional tax-writers began circling high-flying Wall Street money managers as a potentially rich source of new revenue, the firm added Vernon Clark, a veteran solo lobbyist who has worked for tobacco and pharmaceutical companies and the outdoor advertising industry.

For backup, the firm likely will look to its industry’s nascent trade group, the Private Equity Council. The group was formed late last year and is largely untested so far, but it already has lined up an impressive array of K Street power players.

The council, representing 10 of the biggest private equity firms, is reaching out for help from Akin Gump Strauss Hauer & Feld; Brownstein Hyatt Farber Screck; Capitol Tax Partners; and Johnson, Madigan, Peck, Boland & Stewart, according to sources and Senate filings.

So far, the trade group, like Blackstone, is staying mum on the Baucus-Grassley measure, which would tax at the higher corporate rate — not the current capital gains rate of 15 percent — all publicly traded partnerships that directly or indirectly make money as investment advisers or through asset management services.

One lobbyist who represents the Private Equity Council suggested that the group, just getting its footing after launching six months ago, was surprised by last week’s bill and has been in discussions with its members this week to determine what, if any, position to take.

In recent months, as tax-writers have begun flirting with squeezing private equity firms and hedge funds for new revenue, leading players in the industries quietly have built up a defensive lobbying bulwark inside the Beltway.

Among other recent deals, Kohlberg Kravis Roberts & Co. and TPG Capital both tapped Covington & Burling; Thomas H. Lee Equity Partners signed up Dow Lohnes; and Cerberus Capital Management brought on former Sen. Dan Coats (R-Ind.) with King & Spalding.

Blackstone and the other firms under fire also are leaning on more traditional groups such as the U.S. Chamber of Commerce to come out as a public face against the increased taxes. The fiscally conservative, anti-tax Club for Growth also has blasted the Senate Finance proposal.

The chamber’s Bruce Josten called the Senate Finance bill “a revenue grab.” Members are particularly keen to find sources of revenue because Democrats instituted a “pay-as-you-go” rule when they took over this Congress that stipulates any costs must be offset by budget cuts or revenue raisers.

“It seems to me there’s an eye on this huge pile of money being deployed in the marketplace and how do some Members of Congress get their hands on it,” Josten said. “Because one of these individuals lives an ostentatious lifestyle, living the high life, OK, so what, we’re going to declare war on tax policy?”

Josten said that on Monday at the chamber “there was a lot of internal e-mail traffic about” the Blackstone bill, and he expects the big business group, whose membership includes Blackstone and similar companies, to send a letter up to Capitol Hill registering its opposition.

The Blackstone bill would only impact a narrow slice of the industry, since among private equity firms, only Fortress Investment Group and Kohlberg Kravis Roberts & Co. are publicly traded.

But a broader threat could be looming. Senate Finance aides have floated the possibility of raising taxes on private equity firms’ 2 percent cut of the total assets under management, called “carried interest,” that fund managers pockets during deals. Such windfalls currently are taxed at the 15 percent capital-gains rate because they are viewed as investment income, but the Finance Committee is examining the idea of treating them as corporate income, which is taxed at the higher rate of 35 percent.

The Private Equity Council is speaking up against the change, said Robert Stewart, the group’s vice president of public affairs. “We strongly believe the current tax treatment of carried interest is the right treatment,” Stewart said. “It is not compensation for services. There’s a risk involved. There’s a chance there would be no return at all.”

On that front, the industry is getting support from those representing hedge funds, venture capitalists, and real estate investment trusts.

“The fundamental issue here is whether Congress wants to change capital formation and the incentives for long-term investment. The reason you have 15 percent is because you want to encourage long-term investment, and that’s been the underlying policy of the Congress for a long time,” said Lisa McGreevy, executive vice president of the Managed Funds Association, which represents hedge funds.

Meanwhile, with super-rich fund managers facing new and potentially costly exposure on the Hill, many are scrambling for help from downtown.

One tax lobbyist at a prominent tax lobbying firm said his shop has fielded calls from several would-be clients in the hedge fund and private equity world.

“We’ve had a ton of calls,” said this lobbyist, who didn’t want his firm’s name printed because he is negotiating contracts with three potential clients.

And lobbyists are salivating for a piece of the action. Several at prominent firms said they are working to lure clients to their practice — and using the Baucus-Grassley bill as a key selling point.

That bill, said one, “is just the tip of the iceberg” of what Congress is considering, pointing to the possible new tax on earnings.

A Grassley committee aide said the Senator’s motivation comes from his “interest in tax fairness and the structural integrity of the tax code and making sure that various entities are taxed appropriately.”

This aide said that private equity, hedge funds and venture capital firms are an obvious place to look.

While carried interest is not addressed in the current Baucus-Grassley bill, this aide said that Grassley is “interested in exploring and his staff has been exploring that but he’s made absolutely no conclusion one way or the other.”

Correction: June 20
The article “Hedge Funds Bulk Up” incorrectly uses the term “hedge funds” in the headlines and photo captions. The correct term is “private equity.” The article also includes a chart of private equity firms and their lobbyists, which inadvertently reversed the placement of Cerberus Capital Management and King & Spalding.