Capitol Hill Closely Scrutinizes The Blackstone Deal
Friday, June 22, 2007PAUL KANGAS: Lawmakers in Washington are also watching Blackstone with two primary areas of concern. One is China's stake in the company, the other, how the firm and its managers are taxed. As Darren Gersh reports, that tax issue is on the Capitol Hill to do list because of things Blackstone has done.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Three years ago, Blackstone bought Extended Stay hotels for $3.6 billion. This month, it sold the chain for $8 billion. After dividing the profits with co- investors, Blackstone's profit in the deal will be taxed at the capital gains rate of 15 percent. Union lawyer Heather Slavkin says that gives partners in private equity firms an unfair tax advantage.
HEATHER SLAVKIN, LEGAL ANALYST, AFL-CIO: Why should someone who's making tens or hundreds of millions of dollars a year be paying a 15 percent tax rate, when there are fire fighters, teachers, average working Americans who are paying quite a bit more than that in taxes.
GERSH: Fourteen members of Congress today introduced legislation to tax private equity partners at ordinary income tax rates of close to 40 percent. Doug Lowenstein lobbies for the private equity industry and says that legislation would undermine an industry that often shores up troubled businesses.
DOUG LOWENSTEIN, PRESIDENT, PRIVATE EQUITY COUNCIL: And that's the touchstone for capital gains treatment in this country. Are you taking entrepreneurial risk and investing and owning an asset? Private equity does. Most of us in our daily lives do not.
GERSH: Private equity is also getting a closer look from Virginia Senator Jim Webb who's asked the Treasury to examine the national security implications of Beijing's $3 billion stake in Blackstone. Law Professor Mercer Bullard says that could give China influence over the companies Blackstone controls.
MERCER BULLARD, PROFESSOR OF LAW, UNIVERSITY OF MISSISSIPPI: So if China was looking to do joint ventures with those companies or it was looking to buy, to direct the investment of money by Blackstone into companies, it is well-positioned to do so.
GERSH: But the Chinese hold no voting rights in Blackstone. Todd Malan represents foreign investors in the United States. He calls fears of Chinese control a red herring.
TODD MALAN, CEO, ORGANIZATION FOR INTERNATIONAL INVESTMENT: If the Chinese want to invest in these companies, great, we should take their money. If they don't or they impose some sort of conditions, I think Blackstone will tell them to sell their shares and there's plenty of people out there that will buy it.
GERSH: But the Chinese have hundreds of billions of dollars to invest and that's captured the attention of private equity funds and now Congress as well. Darren Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
