Is Anger At The Private Equity Industry Really Justified?

from the black-stone dept

Ever since private equity firm Blackstone came public earlier this year, there’s been a strong backlash against the entire industry. Congress is looking to close a tax loophole that effects both private equity and VC firms, prompting some venture capitalists to lash out against private equity executives for drawing political scrutiny and potentially ending the party. But as Andrew Ross Sorkin points out, all of this outrage pointed at the industry (and Blackstone chief Stephen Schwarzman specifically) is a bit overdone. Plenty of executives could accused of having a big ego or of throwing big, garrulous parties in their own honor, as Schwarzman has done. Ultimately, it was the company’s IPO that served as the catalyst for the outrage, so Blackstone, simply by virtue of being first to go public, has borne the brunt of it all. That being said, if things start to deteriorate economically, expect even more outrage at any executive perceived as having cashed out at the top.

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Companies: blackstone

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Comments on “Is Anger At The Private Equity Industry Really Justified?”

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Anonymous Coward says:

The problem has nothing do with the amount of money these people make, but rather the amount of taxes they pay. People look at every dollar they see being reduced to 65 cents and yet these guys take home 85 cents. That’s what annoys people. It’s not about birthday parties or whatever else this guy claims. It’s purely about the taxes.

Danno says:

I’ll also say that the amount of lending by Banks to Private Equity (and Hedge Funds) has probably driven the sub-prime crisis a fair bit.

Now, granted, the damn banks bear most of the blame for lowering the credit ratings, but everyone involved shoulders a little bit of the responsibility, right down to the sub-prime borrower who asked for credit when they couldn’t meet it.

Jon (user link) says:

I’m really curious about how the hell these guys pull this stuff off – because I’ll say what most of us think, I want to be rich too.

This last year marked the first year I earned a six-figure income, and I have never in my life paid as much in taxes, as a percentage of salary, than I did this last year.

Do I just have crappy accountants? Or do these guys have loopholes they pry open only when it’s 7,8, or 9 figures?

If I was making a lot LOT of money, I’d be happy to pay the 20-30% tax most others pay, but seeing as how I currently only keep .63 cents of every dollar in salary, it’s gives me a headache to think about paying that kind of tax rate if it was ever in the millions and millions of dollars going to our government who provides crappy health care and a retirement system that’s not even going to be there when I retire.

Dave says:

It’s not that the private equity managers and VC’s are exploiting some “loophole” that is unavailable to the middle class and “normal people”, it’s just that the numbers are so big with this group that it attracts more attention. The 15% tax rate is the long term capital gains rate, both for funds, and for me and you.

The fund managers make money both by taking a fee percentage of managed assets, and by taking a cut (usually 20%) of any profits the fund makes. The fee income is ordinary income, and taxed accordingly (after all the deductions and write-offs that come from a business and expensive accountants). The profits come from selling stock that has appreciated. If the fund held that stock for over a year, which is usually the case with private equity, then it is taxed at the capital gains rate of 15%.

So Jon, if you had made that six figure income by selling assets, you would be taxed at that rate too.

Joe Smith says:

No one asked you to buy

Why complain that the Blackstone guys are cashing out at the top? The people buying the shares want to buy.

Blackstone’s business is based on tax arbitrage – leveraged buy-outs have always been based on tax arbitrage.

Blackstone is a deal driven business, the insiders still have the overwhelming majority of shares and the whole thing looks like a conflict time bomb waiting to explode on all of the shareholders.

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