The Blackstone Group: Private Equity Goes Public

• E-mail Terry Keenan

By all measures, it's been quite a year for Steve Schwarzman, the buyout king who heads the Blackstone Group.

First there was the multi-million dollar 60th he threw for a few hundred close friends at New York's Park Avenue Armory — Rod Stewart was the entertainment. The word got out that his Blackstone Group would make history by becoming the first private equity firm to go public. Even the Chinese government is buying into the Schwarzman mystique, putting up $3 billion of its reserves to get a stake in the company and last month, President Bush made a fund-raising stop at his Upper East Side triplex.

New York being New York, it's no surprise that Schwarzman's soaring profile has also brought a fair amount of grumbling from mere multi-millionaire bankers jealous of his incredible success. But there have been other whispers as well. Would the Blackstone IPO blow the lid off one of the best-kept secrets on Wall Street — the remarkable tax benefits that private equity players enjoy? Would too much press about Schwarzman's riches kill the goose that laid the golden egg?

Well, it appears those worries were well founded. In what is sure to be known as the Blackstone Bill, legislation now being put forward by both the Democratic chairman and ranking Republican on the Senate finance committee would close a loophole that allows partnerships such as private equity firm Blackstone to pay the 15 percent capital gains tax on profits, not the much higher corporate tax — even when they sell their stock to the public.

The legislation, if passed, would hit Blackstone right in the bottom line. Investment bankers estimate that the higher tax rate would cut $250 million off profits and billions off the value of Blackstone's publicly traded shares. If so, Blackstone's private equity competitors, as well as hedge funds (who would also be hit by similar tax rules) might be stymied in their efforts to go public. And it's not just Washington that's getting into the act; British lawmakers are looking at similar proposals.

What makes it all really juicy is that many of the firms that stand to lose the most are some of the biggest political donors in the land. So far, industry players have doled out tens of millions in campaign contributions — with nearly 75 percent going to Democratic presidential hopefuls.

It's a big reason why questions about the role of hedge funds have already turned up in the presidential debates — and why a lot of people on Wall Street wish the Blackstone IPO and all the hoopla surrounding it would have never happened in the first place.

Terry Keenan is anchor of Cashin’ In and is a FOX News Channel business correspondent. Tune in to Cashin' In on Saturdays at 11:30am and find out what you need to know to make your money grow and keep what you already have!