Saturday, February 25, 2012

Obama to Cover PEU Founders' Risk

FT reported on risks associated with The Carlyle Group's independent public offering:

Carlyle has to confront not only a sharply weaker business environment but a threat to the favourable tax treatment it has had.

A rise is in prospect in the US – from a preferential 15 per cent rate to being treated as ordinary income – and possibly in several European countries as well.

Carlyle has at least a two pronged strategy for ameliorating this risk.  The first is to prevent the rise or ensure it's watered down in such a way as to have no real impact.  This isn't difficult for power players inside the Government Corporate Monstrosity, Eisenhower's MIC on trillions in federal steroids.

Power Player and Carlyle co-founder David Rubenstein has direct access to Congress and the White House.  President Obama hosted Rubenstein six times in his first year in office.  Rubenstein loaned his copy of the Emancipation Proclamation to the Oval Office.

The second strategy is for the little people to pay.  

If this occurs, the (IPO) document suggests, the firm may increase the money it pays its executives to compensate for (their increased tax) bill and could also issue more equity. That means shareholders rather than the principals would pay the price and face dilution.

President Obama indicated he would accept a compromise, where private equity underwriters (PEU's) could cash in their stakes at the preferred rate  

It's Obama's PEU-liquefication Proclamation, which I expect David Rubenstein to preserve and frame.

Track the latest PEU arc in our PEU World.  Founders win emancipation from taxes.

Update 2-26-12:  Bloomberg noted Obama's move. Taxing carried interest like ordinary income never got through Congress, even when Democrats controlled the House of Representatives, Senate and White House, an exclamation point on our PEU World.