Monday, November 12, 2007

Blackstone Reports Loss: Rangell Looms

Blackstone (BX) investors must really feel like they stepped in it. The form reported a loss today and the news out of Washington is that the House passed Charlie Rangell's latest wealth distribution ponzi scheme.

Back in June, they day before their IPO, I noted, " If you believe in the "greater fool" theory then this would be an indication that these firm are at the top and the people in the know are cashing in" and that "I will stay away..."

Shares currently trade 30% below their IPO high and if today's loss is not bad enough (due mainly to IPO one time charges), the news out of Washington ought to scare investors even more. The House voted 216-193 to approve a bill, introduced by House Ways and Means Committee Chairman Charles B. Rangel, a New York Democrat, that would tax carried interest, through which alternative-asset managers (private equity) derive the bulk of their income, at the 30% rate ordinary income is taxed rather than the 15% capital gains rate they now pay.

Why does this matter? PE has been good for the economy and business. Taxing the income derived from this business will not result in the tax revenue increase Rangell says it will. Why? If these folks recognize they are going to see a 100% tax increase, do we really think they will continue to operate the same way? Do we think they will find an alternate venue to invest their savings? I do. Tax increases never result in the additional revenue they claim to produce because those being taxes will always find a perfectly legal way to avoid the "new" tax.

That being said, if PE is forced to redefine the way it does business the result may be a dramatic decline in investor money that is currently pouring into it. Without new funds and with severely declining credit options, PE will see a huge decline in activity and thus profits.

Now, the senate will not take up the bill until December but, it has passed the House and the specter of its possibility ought to be enough to cause well heeled investors a pause until they know for sure one way or another what will happen. That alone will cause an activity contraction at firms. Chairman and Chief Executive Stephen Schwarzman said "it will be difficult to structure very large leveraged transactions in corporate private equity and real estate until the credit markets improve, pricing of assets is more favorable."

Other PE firms like Fortress Investment Group (FIG) has shares down 45% this year and a planned IPO from Kolber Kravis Roberts (KKR) seems to have just disappeared.

The Blackstone IPO indeed was the peak of the PE market for the foreseeable future and if Rangell gets his way, much longer than that.

 Subscribe in a reader


blogger templates | Make Money Online