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Talk about timing. Only days before Blackstone’s initial public offering, US senators Max Baucus and Chuck Grassley lobbed a grenade into the process that increases uncertainty over the private equity group’s valuation. Their proposed bill would stop private equity groups from going public using a master limited partnership structure - which effectively allows them to avoid paying corporation tax on a large chunk of their profits. That is a real cash impact. If the bill were to go through, Blackstone’s effective tax rate would rise significantly. That should feed directly into the group’s valuation.
Blackstone had always warned that its tax structure could come under threat, so potential investors should have put a discount on the value of the tax benefit anyway. There is obviously a chance the bill never becomes law. And Blackstone would be “grandfathered” for five years, mitigating the impact. But it is still a blow. It adds yet more uncertainty to the IPO, which has already seen Blackstone backpedal on the use of controversial accounting standards.
More broadly, the bill is a clear shot across the bows of the private equity industry before a possible flood of the big firms go public. IIt suggests that lawmakers are likely to continue to go after the industry on other areas of favourable taxation.
Blackstone can at least claim that, if the bill becomes law, it has a five year advantage over others going public. But, in reality, it would be a big chill against others following Blackstone. There is a chance that an overconfident Blackstone was simply too cute on both its accounting and structure. Either way, it looks increasingly clear that its rich IPO and high profile chief executive have helped to focus the minds of lawmakers on the opportunities for raising extra revenue from the private equity industry.
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