Dear Joba:

Fuck off.

Clay

ps - JB's a sox fan. wasn't in the disclosure. sorry.

Mixed Messages

Yesterday, a UPenn academic concluded that the industry will side-step any change in the tax code, resulting in a minimal increase in federal revenues. I suppose the industry could think this is a bad message, as it implies that the industry is sneaky, underhanded tax-avoiders (naw...).

But my guess would have been that the lobbyists/PR firms attached to the industry had a hand in getting the word out about this piece. The message is "Don't raise our taxes, Congress - it won't generate any revenue!"

Today, one of the industry's leading firms says "Don't raise our taxes, Congress - it WILL generate revenue." Am I wrong, or did Blackstone just step all over yesterday's message?

Man, I wish I'd thought of this:

Oh wait, I did. Woohoo!

A UPenn law professor says PE firms will find work-around to changes in tax code:

http://dealbook.blogs.nytimes.com/2007/08/23/how-much-would-a-private-equity-tax-hike-raise/

The paper itself is here:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1007774

His discussion of the alternative structures of PE firms under a new tax regime is of interest -- he approaches, but does not fully articulate, what is the key here -- that a change in tax regime would change the balance of power between GPs and LPs, and force a change in the negotiations between these parties.

Why, then, do people say stuff like this:

“If you tax the managers more heavily, they’re going to take a bigger bite out of what goes to the investors,” added Harvey Leiderman, a pension attorney in the San Francisco office of Reed Smith LLP. “You may intend to tax Wall Street and end up taxing Main Street,” he said. (http://www.pionline.com/apps/pbcs.dll/article?AID=/20070528/PRINTSUB/70525063/1031/TOC)

This is just not true. If you tax managers more heavily, they may ask LPs for "relief" - either in existing funds or future ones. But LPs only have to grant that relief in negotiations if they feel it in their interests to do so; i.e., if good managers have other opportunities equally or more valuable than the partnership arrangement with LP investors.

It is possible, I spose, at the margin, that some manager will choose to ply their skills for an investment bank or an advisory shop instead of a private investment manager if they can't keep more of their income. But it is tough to imagine a mass exodus from PE or hedge funds if, instead of keeping 85% of your $6 million bonus, you keep 72% (the max Alternative Minimum Tax rate for individuals is 28% I believe). Especially when your $6M bonus at a big investment bank you also keep 72% (and leaving aside that your $6M bonus may only be $3M, and your commute is the 2-train and not the Merritt).

In negotiations, managers would have no superior alternative to staying put and paying the higher tax rate. At which point, LPs need not sacrifice a PENNY.

I don't know who Harvey Leiderman is. But he's full of shit.

Meanderings - pt 1

It's foggy in the ol' Towne today, which leaves me feeling nostalgic, anxious and relaxed, all at the same time. Therefore, for no reason whatsoever, a few thoughts:

1) So rarely do web comics intersect with my chosen fields of inquiry:
http://wondermark.blogspot.com/2007/07/323-in-which-it-almost-worked.html
Now, if only Dinosaur Comics will discuss the appropriate governance structure for a unit investment trust!

2) Good job with your news article placement, PR-firms-working-on-behalf-of-the-PE/VC/Hedge Fund industry!

Weak lede: "Some prominent Democrats are beginning to rethink proposed tax increases on hedge-fund and private-equity managers' earnings, after an aggressive pushback by industry lobbyists and arguments that the impact could extend far beyond Wall Street."

Even according to the article, however, the proponents of this change (e.g., Rangel, Levin, Frank) don't seem to be "rethinking" anything. Instead, the industry finally figured out a message (taxing carried interest = bad for pensions & NY) & got a couple of Dems to climb aboard. Now the strategy is to build a consensus for incrementalism and run out the clock.

Smart, and I still don't think it gets thru the Senate. But the politics of this are more sophisticated than the authors of this story represent.

3) I have been thinking about the NASD/NYSE regulatory merger. It's too complex and fascinating to do a slapdash post, so I'll wait. But the acronym really blows. And if I have a suggestion for where they can do some good work right out of the gate, it is in data collection, verification and distribution. But more later...

4) 130/30 funds are featured today in Morningstar. Read with the appropriately jaundiced eye.

Spatt's Replacement at SEC - Overdahl

http://www.sec.gov/news/digest/2007/dig072707.htm

Chester Spatt is returning to the Carnegie Mellon University's Tepper School of Business. The SEC's chief economist has a substantial amount of influence. Not surprisingly, the SEC's regulatory interests involve real analytical work of empirical data. In a sphere dominated by lawyers and politicians, s/he is often the last line of defense. Mr. Spatt did a fine job by my observation, which included some professional interaction with his staff on items that could easily have been resolved in a hackneyed fashion that hurt both investors and investment professionals. Hat's off to him - maybe he can help the Pirates.

Overdahl I don't know at all. We'll be watching, however. First item of concern would be that his most recent gig is advising the energy sector on derivatives. I'm all for private sector experience, mind you. I just think that it helps to have a buffer between you and the tendrils of influence...

I told Mrs. Blunt that...

Chuck Schumer would get involved in the taxation of carried interest issue. And lo & behold:

http://dealbook.blogs.nytimes.com/2007/07/27/schumers-defense-of-private-equity-may-add-fuel-to-the-fire/

It makes too much sense. Schumer, along with the King of New York, is already on record as believing that the U.S. financial services industry is over-regulated compared with the UK. Plus, as chair of the DSCC, he can lever his support for contributions from PE's leaders (if you don't think this article made its way into his daily clips, you don't know Chuck...).

The Dealbook entry, by the way, makes a strange point, suggesting that energy lobbyists would target PE tax breaks out of spite, apparently. I suspect, in fact, that the opposite is likely - Schumer is trying to engage the energy lobby and their spearcarriers in Congress (who aren't generally from the Northeast or CA -- that means you, Chairmen Dingell and Bingaman) to help slow the PE-tax effort or they can expect the harsh light of politics to be turned on its tax breaks.

This is a smart play by Schumer - energy industry taxation is a snarl of givebacks and takeaways, and transparency and public attention are what the industry (hell, most industries) would like to avoid on tax issues...

New Bain fund: "Buy 2 get 1 Free" (well, not free...)

http://online.wsj.com/article/SB118463876366768388.html?mod=rss_Deals_and_Deal_Makers

(subscription required)

Interesting -- price pressure seems to be getting to everyone, including Bain...

As I mentioned once before (and more soon, I hope), I think there are several options the industry and policymakers can use to tax private investment companies fairly, without veering too far to the other side. But one possibly consequence of employing these options is to shift the balance of power towards LPs and away from general partners in private investment companies. LPs will need to approve changes to existing agreements and will have more leverage to negotiate lower fees from general partners unwilling/unable to put their own skin in the game...