Blackstone’s plans for a landmark stock market listing were dealt a blow in the US Senate on Thursday night with proposed new laws that would impose higher taxes on private equity groups seeking to sell their shares to the public.
The move marks the first concrete political challenge in the US to the booming private equity industry and could also derail potential public offerings by other large buy-out groups.
Carlyle, Kohlberg Kravis Roberts, Apollo Management and TPG Capital have all been considering whether to follow Blackstone.
The challenge comes amid calls in the UK for heavier taxation of executives at big private equity firms, as well as recent remarks by one senior figure in the industry that some of the wealthiest individuals pay a lower rate of tax than a cleaner.
The US bill, proposed by Max Baucus, Democratic chairman of the Senate finance committee, and Chuck Grassley, the ranking Republican member, would close a loophole that allows listed partnerships to pay less tax than corporations, casting doubt over Blackstone’s valuation as it nears its $7.8bn (£3.96bn) initial public offering, expected this month.
Mr Grassley, said: “Some businesses are crossing the line between reasonably lowering their tax burden and pretending to be something they’re not to avoid most, if not all, corporate taxes.” The two senators also wrote to Hank Paulson, Treasury secretary, asking him to review the issue.
Under the current tax regime Blackstone, which is treated as a partnership, would pay tax of 15 per cent on its profits. Under the proposed new rules, it would be considered a corporation and be subject to a tax rate of 35 per cent.
The proposed bill gives Blackstone, which is headed by Steve Schwarzman, chief executive, and Pete Peterson, senior chairman, and other listed partnerships until 2012 to comply with the new rules. However, the proposed increase in tax would apply immediately to any rival private equity groups filing for a listing.
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The move by the two senators is a victory for the AFL-CIO, the largest union federation in the US, which had written to the Securities and Exchange Commission asking it to halt Blackstone’s IPO over the tax issue.
The proposed bill faces a long legislative journey before it becomes law as it needs to be approved by the Senate and the House of Representatives and signed by President George W. Bush.
Charles Rangel, influential chairman of the tax-writing House ways and means committee, on Thursday lent his support to the proposed bill. “We should not permit one segment of the financial services industry to enjoy a competitive advantage over others,” he said.
However, it is unclear whether the proposed bill would enjoy broad support on Capitol Hill and within the White House. A spokesman for Mr Bush said the administration was “reviewing the legislation”.
Blackstone declined to comment. However, supporters of the private equity industry said the proposed bill would actually lead to a reduction in tax revenues by deterring other buyout groups from listing.
Additional reporting from Andrew Ward and Jeremy Grant in Washington
