Congress Eyes Higher Tax Rates for Private Equity Firms

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• JEFFREY BROWN:

  Today's public offering by the Blackstone Group, setting the market value of the company at some $38 billion, is just the latest big splash for an industry that has quickly become a major player in American finance. So-called private equity firms typically buy companies using large amounts of borrowed money, then resell them at a profit.

  They've been fantastically successful in recent years, earning vast sums for their executives, including Stephen Schwartzman of Blackstone, and for their investors. But they've also come under increasing fire from a growing number of lawmakers, who worry about a lack of oversight and believe these companies should pay higher taxes.

  We look at the situation now with Douglas Lowenstein, president of the Private Equity Council, an industry trade and lobbying group; and Dan Pedrotty, who works on investment and corporate governance issues for the AFL-CIO.

  And welcome to both of you.

  Douglas Lowenstein, first, remind us a little bit, tell us a little bit more about how these companies operate and how they make their money.

• DOUGLAS LOWENSTEIN, President, Private Equity Council:

  Sure. Well, private equity is really a form of ownership. We essentially have two forms of ownership in this country: private ownership, which, in fact, represents the vast majority of companies in the United States; and public ownership, companies that are traded on public stock exchanges.

  What private equity firms do is organize funds. They raise money from investors, typically pension funds and university endowments…

• JEFFREY BROWN:

  So large investors.

• DOUGLAS LOWENSTEIN:

  Large investors, typically, high net worth individuals are part of that. And they deploy those funds by acquiring companies who might be public companies who are underperforming companies that might have been struggling and not succeeding. They might acquire divisions of other companies, where the parent company has decided that it's not a good fit and they can't really give it the attention it deserves is. Or they might even acquire family-owned businesses, where the family owners are ready to liquidate their investment.

  The private equity firm comes in, invests in those companies, typically operate them, own them for three to five years, with the goal of growing them, increasing their value, because the entire business model is predicated on buying the company at one price and hopefully selling it down the road at a profit.

  And the economic model is essentially that the private equity firms generate their money by selling these businesses at a profit: 80 percent of the return when they make a sale goes to the investors; 20 percent goes back to the private equity funds.