Saturday, October 26, 2013

PEU-palism Finally Noticed

The Economist reported on the New American Capitalism distinguished by the virus like spread of Master Limited Partnerships:

The new popularity of the MLP is part of a larger shift in the way businesses structure themselves that is changing how American capitalism works. The essence is a move towards types of firm which retain very little of their earnings: “pass-through” companies which every year pay out more or less as much as they take in. Many of the standard rules that corporations which retain their earnings have to follow when dealing with shareholders do not apply to such firms. And, crucially, so long as they distribute their earnings such set-ups can largely avoid corporate tax.

Private equity underwriters (PEU's) behave like MLP's, even after going public:

In 2007 private-equity firms seized on another clause in the tax law on interest and dividends that enabled the MLP structure to be used for publicly listed components of Apollo, Blackstone, Carlyle, KKR and other private-equity companies.
Which explains why The Carlyle Group is a virtual nonprofit in the taxes it pays.

Meanwhile, an entire layer of public companies using these new structures stands outside the (shareholder rights) debate. The prospectuses that Apollo, Blackstone, Carlyle and KKR published before listing are clear about the rights of unit holders to influence corporate decisions: “limited” is an understatement.
Consider how PEUbiquitization occurred in our country without one peep from 60 Minutes.

Among all firms, in 2008 pass-through structures accounted for 23% of companies and 63% of profits, according to the latest data available from the Internal Revenue Service (IRS)
I noticed PEU tax avoidance early on and asked my CPA Congressman about it in August 2007.  He ignored my question.  Then again he received substantial donations from PEU affiliates.

The new American capitalism is PEU-palism.

Update 10-28-13:  Senator Bernie Sanders (I-VT) noticed what 60 Minutes hasn't been able to find.  Carlyle co-founder David Rubenstein talked about many things in a recent interview, but not this subject.

Update 7-19-14:  Others noticed how 60 Minutes now offers puff pieces.