Wednesday, August 3, 2011

Tax PEU's Economic Net Income

Private equity underwriters (PEU's) have a language all their own.  Special dividends and distributions are a "liquidity event."  Lower taxes on profits come via "carried interest."  PEU's report "economic net income," which includes unrealized gains and losses.

Blackstone reported second-quarter economic net income was $703 million, up from $205 million a year earlier.  KKR's economic net income fell to $315 million, down 27 percent from $433 million a year earlier.  It came in at 36 cents a share compared to last year's 48 cents.  Contributing to the drop were higher-than-expected management fee refunds and a dip in deal flow activity.

PEU's hate paying taxes, which is why they load up affiliates with debt/interest expenses and annual management fees.  They recoup much of their initial investment via special dividends, frequently adding debt to pay dividends before taking affiliates public.

Congress should pass a bill making PEU's pay corporate taxes on economic net income.  That might get rid of one nonsense measure, intended to puff up PEU economic might.  What will the PECKER Council bring next?  PECKER stands for Private Equity Capital Knowledge Executed Responsibly.  I think it's solely for their behalf, i.e. pleasure.

Update 8-4-11:  Dealbook reported "economic net income is a nonstandard profit measure used by publicly traded private equity firms that excludes some stock-based compensation costs."And the purpose of excluding stock-based compensation costs by publicly traded PEU's?  Opacity.