Private Equity Going Public

The impact of private equity firm Blackstone Group going public could be huge. Private equity deals and funds are booming. Of the top ten private equity deals of all time, 9 out of the 10 deals were done in 2005 or later. The one exception being the RJR Nabisco deal made famous in the book "Barbarian at the Gates."

Many in the private equity billionaire's club prefer to fly under the radar. The amount of wealth in the industry is something they would prefer to keep out of the public eye. That is why many in the private equity industry are cursing Stephen Schwartzman of the Blackstone Group. One of the fears of disclosing the lucrative pay structure of private equity funds is that the feds might intervene once they understand how much these firms and partners earn. As a part of the process of going public, the world got its first glimpse of how lucrative a successful private equity firm like Blackstone is. Once Blackstone opened its books, the world took notice.

The Blackstone numbers have raised the eyebrows of two powerful US Senators. Senators Max Baucus (D-MT) and Charles Grassley (R-IA) are looking to change the way in which private equity firms and partners are taxed. Instead of being taxed using the 15% capital gains tax status, Baucus and Grassley believe that these firms should be taxed at standard corporate tax levels.

VC firms are also getting dragged into the conversation. VC's fund gains are taxed under capital gains (15%) tax classification as well. There is concern in Silicon Valley and at other VC firms that they too may be lumped into a new tax classification.

If private equity and VC can no longer benefit from using the capital gains tax formula, these previously hugely popular investment vehicles may come under pressure. It will be difficult for these firms to make their historically strong returns over more traditional investment funds.

Wall Street and Silicon Valley will be watching Baucus and Grassley's proposals carefully. If legislation does pass to close the "tax loophole", VC and private equity firms may have a difficult time in attracting institutional investments. For startups in Silicon Valley and elsewhere, it could reshape the fund-raising and exit strategies for these companies. Wealthy individuals may increase their activity in angel investments due to the tax advantages. It is difficult to predict the impact of a tax reclassification, but if one does pass, there are a couple of safe bets: Schwartzman will cement his status as the least popular private equity partner on Wall Street and Silicon Valley, and VC and private equity investing will forever be changed.