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Private equity may have tax bill coming

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TESS VIGELAND: The private-equity powerhouse the Blackstone Group went public today. Shares promptly jumped more than 13 percent, raising more than $4 billion for the company. The stock closed up $4.06 to $35.06 a share. And yes, that means billion-dollar paydays for the principals.

There’s talk another marquee name, Kohlberg Kravis Roberts, may be next. But Congress is looking into how private equity earnings are taxed. So how can anyone know what the company will be worth? Here’s Marketplace’s Steve Tripoli.

STEVE TRIPOLI: Sure Blackstone’s hugely successful. And these days all of private equity’s hotter than, well, July. But that price. Bob Profusek heads mergers and acquisitions at the big law firm Jones Day. He says Congress telegraphed its intentions toward private equity before investors opened their wallets today.

Bob Profusek: So buyers are factoring in the likelihood of a change in the tax laws into the transaction. Nonetheless, it’s still been received terrifically by Wall Street.

But Harvard Business School private-equity expert Josh Lerner says investors still don’t know everything. Both the tax and regulatory treatment that firms like Blackstone will face are up in the air.

Josh Lerner: And it certainly adds a level of risk, one which would certainly give many investors at least some degree of pause.

The folks who may not be pausing are other private equity firms pondering the leap into offering stock. KKR, for example. Boston College accounting professor Gil Manzon says the prospect of policy changes and electoral swings may drive firms like KKR to cash out now.

Gil Manzon: The politics are very real in tax policy, and if in fact the market believes those changes could occur in ’09, that may push through some more transactions.

Harvard’s Josh Lerner says not all private-equity companies are going to want to go public.

LERNER: On the one hand, there is the tax and regulatory issues associated with being public. But there’s also the fact that private equity works best sometimes behind closed doors.

In other words, it’s sometimes easier for private equity to be effective when it’s, well, private. Which means Blackstone may find it tougher to provide value to its new shareholders, now that it’s selling them shares. Go figure.

I’m Steve Tripoli for Marketplace.

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