Raising Taxes on Private Equity Investments Could Hurt U.S. Companies and Competitiveness, PEC Tells Congress

    WASHINGTON, July 31 /PRNewswire-USNewswire/ -- Raising taxes on the
 private equity investment industry by 130 percent could reduce investments
 in companies, lower returns for pension funds and other investors and hurt
 the competitiveness of U.S. capital markets, the chairman of the board of
 directors of the Private Equity Council told Congress today.
     "There will be deals that won't be done, entrepreneurs who won't get
 funded and turn-arounds that won't be undertaken," said PEC Board Chairman
 Bruce E. Rosenblum, managing director of The Carlyle Group, one of the
 council's 11 members.
     In testimony before the Senate Finance Committee, Rosenblum said the
 Private Equity Council opposes two bills that would significantly raise
 taxes on private equity investment firms because they would undermine an
 industry that has made a major contribution to the American economy. HR
 2834 would tax profits earned by private equity firms on long-term
 investments at the regular income rate of 35 percent instead of the
 long-term capital gains rate of 15 percent. S1624 would impose a 35 percent
 corporate income tax on private equity partnerships that decide to go
 public.
     A major force in strengthening U.S. competitiveness
     "I urge you to proceed very carefully before risking an adverse impact
 on a form of ownership that has been a major and positive force in
 strengthening U.S. competitiveness, giving struggling or failing businesses
 a new lease on life, and pumping critically needed capital into the
 economy," Rosenblum said.
     Private equity investment firms between 1991 and 2006 returned more
 than $430 billion in profits to their investors, nearly half of which are
 public and private pension funds, university endowments and charitable
 foundations, he said.
     Changing the tax structure would make U.S. private equity investment
 firms less competitive with their foreign counterparts and foreign
 governments that are amassing large investment funds, Rosenblum said. He
 added that a large tax increase could prompt the next generation of private
 equity investors to set up their shops outside the United States, diverting
 investment capital from U.S. businesses to foreign competitors.
     Critics are wrong to suggest that private equity investment firms
 benefit from tax loopholes, Rosenblum said. Taxes on private equity firms
 are based on their ownership interests in long-term investments -- their
 portfolio companies -- that appreciate in value.
     PE firms are taxed at the same rate and in the same manner as any other
 partnership -- including those that invest in real estate, oil and gas,
 start- up enterprises and family businesses -- that owns an asset that
 increases in value over time and later is sold for a profit.
     "The tax treatment of this ownership structure is well settled by case
 law and administrative rulings of the Internal Revenue Service. It is
 anything but a loophole." Rosenblum said.
     Countering an argument made by tax increase advocates, Rosenblum said
 that there is a clear distinction between owners who take entrepreneurial
 risks to grow businesses over time and employees who are paid based on
 their performance.
     Rosenblum quoted a new PEC-funded study by David A. Weisbach, Walter J.
 Blum professor at the University of Chicago Law School. In the study, "The
 Tax Treatment of Carried Interests in Private Equity Partnerships,"
 Weisbach said: "The tax law makes a fundamental distinction between an
 employee performing services and an entrepreneur creating or increasing the
 value of its business. There is little question that a sponsor of a private
 equity fund is more like an entrepreneur than an employee. The sponsor is
 the driving force, the individual with the ideas and the skill to make a
 project happen. The sponsor is the general partner of the fund with
 exclusive control over the fund's activity. ...[T]he sponsor bears all of
 the fund's residual risk."
     Contrary to critics, private equity firms take on substantial risks,
 including risks to their capital, Rosenblum testified. The firms' partners
 contribute significant risk capital to their funds and they can lose all or
 some of it, just like their limited partners. Private equity firms, large
 or small, also face the real risk that after investing in and working with
 their portfolio companies for years -- six years is the current average --
 they will have nothing to show for their efforts if things go bad. In that
 situation, they also could face significant legal and financial
 liabilities, he said.
     Rosenblum added that capital gains treatment has never been tied to the
 proportion of capital contributed to the venture. The founder of a
 technology company may put very little capital into the business and over
 the years raise billions of dollars in equity financing from third parties.
 Still, the founder will receive capital gains treatment on the sale of his
 or her 50 percent stock ownership, even if he or she has provided only five
 percent of the capital, Rosenblum said.
     The full text of the Rosenblum's testimony is available under the
 "Public Policy" tab on the PEC web site at:
 http://www.privateequitycouncil.org.
     About The Private Equity Council
     The Private Equity Council, based in Washington, DC, is an advocacy,
 communications and research organization that develops, analyzes and
 distributes information about the domestic and international private equity
 industry. Its members are: Apax Partners; Apollo Advisors; Bain Capital;
 The Blackstone Group; The Carlyle Group; Kohlberg, Kravis & Roberts;
 Hellman & Friedman; T.H. Lee Company; Providence Equity; Silver Lake
 Partners and TPG Capital.
 
 

SOURCE Private Equity Council