But this conventional wisdom may be overstated. Mr. Schwarzman will encounter a number of problems abroad:
LIMITS ON PROFITS
Private equity has had some wondrous investments in the United States. Only a few years ago, Kohlberg Kravis Roberts and two other private equity firms made $1.2 billion in about a year by investing in the satellite company PanAmSat.
Outside the United States, though, regulators often lash out when private equity firms profit unduly at the local investors’ expense. Lone Star Funds, based in the United States, for example, bought about 71 percent of Korea Exchange Bank in 2003 for $1.2 billion. Lone Star’s plan to sell the stake in 2006 for $7.3 billion was scuttled by the South Korean government because of the enormous profit. Lone Star and its local executives subsequently faced criminal charges, and Lone Star is now trying again to sell its remaining stake for $4.1 billion. Lone Star’s experience shows the nationalistic tightrope that private equity walks abroad, risking penalty if it is seen as taking undue advantage of local investors.
In the United States, private equity again won the carried-interest battle, and private equity managers’ profits will remain taxed at the lower capital gains rate rather than income. But in France, Germany, Sweden and most other European countries, taxes are much higher, approaching 50 percent..
Regulation in the United States is often less intrusive compared with that in the countries where private equity firms have set their sights. The European Union is about to adopt the Alternative Investment Fund Managers Directive, which will impose greater capital and disclosure requirements on private equity firms, regulation which is much stricter than the Dodd-Frank Act.
LACK OF RULE OF LAW
Sometimes it is not too much law, but too little. In many countries, like Russia, the rule of law is significantly weaker. Laws are malleable, and courts can be purchased or influenced to a local’s advantage. This is not just non-Western countries. In Australia, for example, the country’s tax regulator reinterpreted its tax rules to serve TPG Capital with an unexpected bill of $600 million related to its 2009 sale of the retail chain Myer.
RESTRICTIONS ON OWNERSHIP
In the United States, private equity can freely purchase and sell companies. But in other countries, there are restrictions on foreign ownership. In India, foreign ownership of retail businesses is largely prohibited, and investment in a foreign company requires the approval of two different regulators. In China, not only is pre-approval of foreign investment required, but investments are also allowed only in certain industries.
The effect of these restrictions is to force private equity firms to team up with locals. K.K.R., for example, only last week bought a minority passive stake with a Chinese private equity firm in VATS Liquor Store, China’s largest liquor purveyor. But these domestic investors can use the lack of rule of law or simple nationalism to take advantage of their foreign partners. In a prominent example, Danone, the French yogurt maker, fell out with its Chinese joint venture partner. The two ended up in litigation in mainland China and abroad, and Danone eventually sold its stake and left the country.
CURRENCY RESTRICTIONS AND RISKS
In today’s world, private equity can be tripped up by countries’ trying to influence the value of their currencies. Indonesia, South Korea and Thailand have all imposed financial levies on foreign purchases of various securities. China restricts foreign currency investment, which is why there has been an attempt by private equity firms to set up renminbi-denominated funds. And then there are the euro’s problems.