Legislation May Drive Private Equity Offshore, Advocate Warns
Douglas Lowenstein, president of the Private Equity Council, told CNBC’s “Squawk Box” that a bill pending in Congress could drive private equity offshore.
He said the legislation, introduced last week by U.S. Sen. Max Baucus (D-Mont.), and Charles Grassley (R-Iowa), would discourage U.S. private-equity firms from going public and undermine the nation’s financial competitiveness. The measure would boost the tax rate to 35% from 15% on private equity firms that go public.
However, the bill would allow Blackstone Group, which raised $4.13 billion in an initial public offering, to continue paying a 15% capital gains rate until 2012.
“I think anytime you increase taxes on a business by more than 100%, it would require a hard look at the business model and what you need to do to modify it,” Lowenstein said Friday. “I think the implications are potentially quite significant [and] could drive this capital offshore. You could significantly reduce the volume of buyout activity.”
Lowenstein said he didn’t see the bill as part of an “orchestrated attack on private equity,” and said there is an “understandable and appropriate concern about income disparity.”
But he said current tax law is “defensible and appropriate.”
“The partnership tax laws as they relate to capital gains have been around for 100 years,” Lowenstein said. “The [laws] apply to private equity, real estate partnerships, oil and gas partnerships, small business investment companies. This is not some unique loophole exploited by private equity -- it’s a fundamental part of American tax policy."
He added, "There are some very fundamental principals that drive it, including the notion that entrepreneurial risk deserves capital gains treatment. We’re going to defend that principle because we think it’s right.”
The Private Equity Council is an advocacy group based in Washington, D.C. Its members are: Apax Partners; Apollo Advisors; Bain Capital; The Blackstone Group; The Carlyle Group; Kohlberg, Kravis & Roberts (KKR); Hellman & Friedman; T.H. Lee Company; Providence Equity; Silver Lake Partners and TPG Capital.