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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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Bloomberg
CHARLES IN CHARGE House Ways and Means Committee chairman Charles Rangel will focus on fixing the AMT next year. A private equity tax could end up in the mix.
October 22, 2007 12:01 AM ET
All indications are that a controversial bill to tax private equity carried interest as regular income will have to wait until 2008. But for lawmakers and corporate governance watchdogs, carried interest is just the start of a campaign to make life miserable—or at least more expensive—for the private equity crowd. Last week, House Ways and Means Committee chairman Charles Rangel (D-N.Y.) drove another nail into the coffin of the carried interest bill, saying the overall tax reform he had been planning—an effort to which the carried interest bill was to be attached—would be postponed until 2008. Senate Majority Leader Harry Reid (D-Nev.) has also said recently that he would not schedule the carried interest legislation for a floor vote until next session at the earliest. According to staffers on Capitol Hill, Mr. Rangel plans this year to introduce a major $1 trillion tax code overhaul, dubbed the “mother of all tax reform bills,” so that the business community and other interests can start debating the bill and begin the long work of crafting a final tax bill for next year. Mr. Rangel’s tax overhaul plan is designed primarily to fix the alternative minimum tax, but it will also include a number of provisions to offset the cost of such a fix. One such provision was the PE carried interest bill, which is expected by some fans of a higher PE tax to generate several billion dollars in new revenue annually to help pay for an AMT fix. The bill would increase the current 15% tax on carried interest to as much as 35% for private equity firms, venture capitalists, real estate trusts, hedge funds and numerous oil, gas and commodity investment vehicles. Because the carried interest bill had generated harsh opposition from some lawmakers, and President Bush had vowed to veto it, the legislation’s best chance of survival was to be attached to a larger tax reform bill. Congress is operating under what are called “pay-go” rules, wherein proposals that would spend additional money need to be offset by revenue-generating proposals or higher taxes. But instead, it seems lawmakers have decided to pursue another one-year patch on the AMT rather than take on larger reform. Still, a spokeswoman for Rep. Sander Levin (D-Mich.), who sponsored the carried interest bill, said the PE tax legislation is “still very much in the mix” and that it would likely be attached to the one-year AMT patch legislation, a smaller bill. “That bill still needs to be paid for,” she said, adding that that means carried interest may still be in play. “We are not doing any victory dances by any stretch,” said Emily Mendell, a spokeswoman for the National Venture Capital Association, agreeing that the temporary AMT patch could find a home for a carried interest tax hike. The venture capital group has been distancing itself from large buyout shops like Carlyle Group and Blackstone Group, which have been the main lightning rod for PE fund criticism the past year. “We don’t want Congress to lump us together with [buyout firms],” Ms. Mendell said. The next two weeks are crucial, sources say, because to institute an AMT patch the Internal Revenue Service would need to amend its forms soon. Robert Stewart, spokesman for the Private Equity Council, declined to comment on the carried interest legislation or other criticisms of private equity firms. In a written statement, he cited a recent Ernst & Young report that found that in 2006, private equity-owned businesses grew three times faster than public companies. In 80% of PE buyouts, employment levels at the target companies stayed the same or improved. While the carried interest bill is not exactly dead, it certainly seems to be in a coma. Yet that hasn’t stopped industry critics, most notably unions, from ramping up challenges to private equity in other areas, including allegations of deficient care at PE-owned nursing homes, product safety concerns at PE-owned companies and abuses of PE offshore tax havens. Leading the charge is the Service Employees International Union. Earlier this year, SEIU president Andy Stern had said that the private equity firms he had spoken to seemed easier to work with than public corporations regarding employee issues. But things are different lately. It seems now that while public corporations are the devil unions know, private equity is the devil they don’t—and the blitz of attacks on private equity reflects a change in position. “We were initially hopeful,” explained Stephen Lerner, director of private equity projects at SEIU. “In the end they have been unequivocally unable to address the issues,” Mr. Lerner said, citing such issues as health-care benefits for employees and what he called pay disparities between owners and rank-and-file workers. “They’re willing to spend a lot of money on lobbyists, but not on these issues.” One of the growing areas of concern is nursing care. SEIU has been leading the charge against Carlyle Group in its $6.3 billion takeover of HCR Manor Care, one of the nation’s largest nursing home chains and employer of more than 1,000 SEIU members out of its 60,000 employees. The union charges that nursing homes taken over by private equity see the quality of care diminished. Lawmakers are starting to pay attention to such talk. Last week, Sens. Max Baucus (D-Mont.) and Charles Grassley (R-Iowa), chairman and minority leader, respectively, of the Senate Finance Committee, said they would hold oversight hearings on nursing homes taken over by private equity. The senators want the Center for Medicare and Medicaid Services, the federal agency that oversees nursing homes, to make sure health care quality standards are maintained under private equity ownership. “Nursing homes aren’t just investment vehicles,” Mr. Baucus said in a statement. “Investor-owned facilities are by no means exempt from proper standards of care for seniors and the disabled.” SEIU wants more than rhetoric, however. It has called for a Government Accountability Office audit of nursing homes and plans to hold an anti-Carlyle rally today in Washington. The union has also stoked flames of controversy at Sunrise Senior Living (considered a ripe target for a private equity takeover), alleging conflicts of interest and stock option backdating abuses. Manor Care could not be reached for comment. “Providing quality care is our top priority,” Carlyle spokesman Christopher Ullman said, adding that poor quality has not been documented at Carlyle-owned health-care companies and that the buyout of Manor Care has not yet been completed. Union critics have said that SEIU has been trying for years to unionize nurses at Manor Care and elsewhere. Carlyle has been targeted by SEIU for other reasons, including for allegedly using its highly leveraged buyouts of defense and health care companies, which are paid mainly through government contracts, to take massive tax deductions. Carlyle is able to do that, says SEIU, because its debt is greater than the revenue from government contracts, which allows a large tax deduction. The list of other targets goes on and on. The AFL-CIO had been a critic of Blackstone’s initial public offering, calling for the Securities and Exchange Commission to require the PE firm to register as an investment adviser. SEIU has issued a report about Toys R Us, which is owned by Kohlberg Kravis Roberts, recalling thousands of toys for unsafe levels of lead. The target on PE firms’ chests has been getting larger in Congress as well. Last week Sen. John Kerry (D-Mass.), who has criticized the carried interest bill, proposed legislation to prevent hedge fund managers from keeping pretax deferred compensation in offshore tax shelters. Such changes would impact PE managers if they keep such compensation offshore as well. The IRS has also been looking into hedge fund and PE tactics with offshore tax havens, including one in which firms sell loans to foreign companies to avoid taxes. While 2007 was deemed to be the golden age of private equity buyouts and profits, next year might be the dark ages, as all these issues come to a head, especially if influential tax writers, including Mr. Baucus, put private equity taxation at the top of their agenda. FW
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