At this week's Super Return 2008 conference in Munich, nearly 1,000 attendees gathered, including leading private equity professionals and the constituents they care most about—their investors.  During a speech, David Rubenstein, Founder and Managing Director of The Carlyle Group, conducted an informal survey of the audience.  The audience was asked, "Think taxes will go up?"  The New York Times reports that "many hands" went up.

 
It would appear that many in the industry view a tax increase as inevitable.  However, this hasn't stopped them from throwing money at lobbying groups to try to avoid such increases.  Ultimately, it's their money, so they can do what they want.  But for a professional class that promotes the efficient deployment of capital, this would appear to be a waste of resources.

For more info on private equity, check out www.warongreed.org and my book, Imposters at the Gate.

Will private equity lose a part of their “WE ARE THE GOOD GUYS!” argument?

Private equity heads converge in Munich this week.  The conference has a far more somber tone than in prior years.

Limited partners at the meeting acknowledge that returns will be lower because of the credit crunch.  We won’t go into private equity’s hand in creating that phenomena; we’ll just stay with the fact that fewer deals will get done.

An interesting debate has developed regarding sovereign wealth funds and their participation as investors in private equity funds.  The head of pension fund CALPERS, (the California Public Employees’ Retirement System) acknowledged that the presence of such investors will require additional scrutiny.

Legislation is being presented this week in the California State Assembly that would preclude CALPERS from investing alongside these sovereign wealth funds.

If this passes and becomes a standard across all public pension money, private equity will lose a key foundation of its argument that the ultimate beneficiaries of their success are the millions of workers who receive these pensions.

With whom will the private equity funds side?  Clearly, the ones with the deeper pockets. 

Private equity firms shell out large sums of money for advice in many forms.  There are strategy consultants, market research firms, accountants, management assessment organizations, etc, etc, etc.  There is a long list of organizations that have experienced a large influx of fees as the private equity industry has grown.

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None of them is called more frequently, loved more or sent bigger checks than the tax adviser.  

Having been a partner in a private equity firm, these conversations all center on one topic: HOW DO WE SWINDLE THE GOVERNMENT?

As a former partner in a private equity firm, I have seen greed at all levels.

In my opinion, there is no greater exemplification of private equity greed than the taking public of a portion of the management companies of private equity firms.  Blackstone and Fortress were two that pulled it off.  KKR filed documents to go public and several others, including The Carlyle Group, were rumored to do IPOs; however, market conditions kept the latter few from swindling the public markets to line their pockets.  The moves by Blackstone and Fortress proved prescient: They made out like bandits.

Blackstone went public at $31 a share on June 22, 2007.  This netted the firm’s partners $3.7 billion.  The two founders had the best paydays.  Steve Schwarzman had a nearly $450 million payday with a residual 24% ownership in the company valued at $7.5 billion.  According to public filings, Schwarzman received cash payouts of $400 million the year prior.  His co-founder partner, Peter Peterson, cashed out $1.9 billion and retained a 4% stake in the company.   

Fortress came out in February 2007.  Their five founders had a payday of $409 million.  This was after taking combined distributions of $447 million the year prior.

Both companies had a short spike in stock price post-close and have since been trading below its IPO price.  Did most institutions cash out at the spike leaving the crumbs for the average investor that has lost money?

Articles on Steve Schwarzman estimated his net worth at $10 billion before the IPO.  The IPO nearly doubled his net worth.  

Stay tuned – how the Blackstone partners cashed out $3.7 billion in its IPO and avoided paying taxes on it.