Thursday, 16 August 2007

SEIU calls for private equity tax changes

This is from today's FT. As the Pink 'Un notes, the SEIU has been trying to be pretty pragmatic in its approach. It's Behind The Buyouts report on the private equity industry went as far as suggesting that PE firms adopt some voluntary best practice principles, something the industry (naturally) sniffed at. But the debate has turned on its head, especially given recent market developments. The unions know (or should do) that they are in a stronger position in the debate now. And you wouldn't bet against a review of PE taxation in most developed markets.

US union hits at private equity ‘tax dodges’
By Edward Luce and Stephanie Kirchgaessner in Washington

Published: August 16 2007 03:08 | Last updated: August 16 2007 03:08

Andrew Stern, president of the Service Employees International Union, on Wednesday day called on Congress to look more broadly at the “tax dodges” of private equity groups which he said are receiving billions of dollars in public subsidies “at the expense of everyone else”.

Mr Stern’s attack is significant because SEIU – one of the US’s most centrist and pragmatic unions – had this year said it wanted to work with private equity groups to ensure employees of companies taken over in leveraged buyouts were treated as stakeholders.

But the SEIU, which has attracted criticism from other unions for working with Wal-Mart on healthcare reform, said it had failed to find one uninsured American who had received healthcare as an employee of a private equity group.

Mr Stern also warned the pension funds that invest on behalf of the SEIU’s 1m public sector members to think twice before investing in the portfolio funds of Kohlberg Kravis Roberts – one of the largest private equity firms – and to avoid buying shares in its initial public offering.

Pension funds with SEIU members’ money account for more than 30 per cent of KKR’s $16.6bn (£8.3bn) 2006 Fund, he said. Lobbyists for the private equity industry have warned in congressional ­testimony that a tax rise could lead to a reduction in pension fund returns.

“The leveraging strategies of KKR have run headfirst into the credit crunch and it raises concerns that pension fund investments in KKR could be at risk,” Mr Stern said. “I agree ... that what is good for business is good for America. But I don’t think that applies to private equity groups.”

The SEIU also criticised the Carlyle Group, a private equity group headed by David Rubenstein, for benefiting from interest payment subsidies on its recent $6.3bn takeover bid for ManorCare, a nursing home group, which the SEIU says will cost the taxpayer $600m in foregone revenues.

A trade group to which ManorCare belongs, funded advertisements attacking a bill that would expand federal coverage to uninsured children. “I find it offensive that David Rubenstein, whom I’m told is now worth $1bn, could be involved in efforts to restrict health insurance for uninsured children,” Mr Stern said.

Carlyle said: “Carlyle does not yet own ManorCare and therefore has no involvement in its trade association’s activities. So such a claim is quite a stretch.”

Mr Stern’s attack comes amid debate within the Democratic Party over whether to redefine the tax status of “carried interest” private equity revenues. Critics say it provides a large loophole for private equity and hedge fund executives to pay far lower taxes than others.

Chuck Schumer, a leading New York senator, said he was opposed to any tax rise that targeted the private equity industry because it would unfairly penalise his home state.

The Private Equity Council, a Washington-based lobbying group, said: “Portfolio companies owned by private equity firms pay corporate taxes, payroll taxes, health insurance taxes and real estate taxes, just like any other company. There is no evidence that private equity-owned firms are more apt to lay off workers than publicly traded companies. In fact, several studies suggest just the opposite.”

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