It’s not Mr. Smith Goes to Washington exactly, but about 20 secondary private equity buyers have been fighting a good fight in the halls of Congress, and like Jimmy Stewart’s character in the Frank Capra classic, they’re winning. With the help of attorneys and Washington lobbyists, the group of secondary private equity buyers managed to exempt private equity firms from a proposed tax code change that could discourage secondary sales.
The initial proposed change involves Provision 754 of the Internal Revenue Code. Under the change, private investment partnerships would be required to document records for limited partners gained through a secondary sale. Having to account separately for secondary buyers would add thousands of dollars in cost to private equity firms and harm the secondary market. The provision, which was passed by the Senate in May, is a small part of a large bill that includes a plethora of tax changes and economic issues.
“It’s not clear if this was an anti-abuse measure or if it was a matter of tax policy,” said Michael Sutton, an attorney with Testa Hurwitz & Thibeault, who has worked with the secondary coalition on the issue. “It might have been thrown in with anti-Enron type tax-shelter provisions but I don’t’ think it’s necessarily that.” Another benefit to the government, besides curbing corporate abuse, is to generate tax revenue. Sutton first saw a draft of the bill this past fall and quickly realized that the issue was one that the venture capital and private equity communities would take an interest in.
A group of about 20 secondary firms came together to begin lobbying for private equity firms to be exempt from this provision. The group is led by New York-based Willowridge and Boston’s HarbourVest. PricewaterhouseCoopers has been lobbying on behalf of the group with the help of the National Venture Capital Association (NVCA).
According to Jennifer Dowling, Vice President for Federal Policy and Political Advocacy for the NVCA, legislators and their staff were not aware of the implications on VCs or private equity markets. “They were looking at what they considered to be the correct pure tax approach and had not considered the practical implications of this for our industry,” she says. “Many of them were not very familiar with our industry. A lot of what has been going on has been an educational effort.”
The group managed to get a change made to language in the U.S. House of Representative’s bill known as the American Jobs Creation Act,’ which passed the House of Representatives on June 17. The new language exempts private equity investors from the mandatory 754 bookkeeping.
“We found the reception to be very sympathetic,” says Lindy Paull, a managing director with Pricewaterhouse
Coopers who led the lobbying effort. “The proposal was directed at abusive partnership transactions. There have been no indications of any abuse in [the secondary private equity] industry or in the private equity fund-of-funds industry.”
The bills passed by both the House and Senate need to be reconciled in a conference committee, which is no small task for two very different bills in an election year. Both bills contain controversial elements unrelated to Provision 754 that could cause a prolonged political battle or stymie the legislation entirely. Still, those involved with the secondary buyers’ lobbying efforts say that politicians and staffers alike in both houses and both parties are sympathetic to their cause and are confident that the compromise bill will contain the preferred language of the House bill. The task that the secondary buyers are undertaking now is to refine the definition of a private equity investor, which would broaden the scope of the exemption.
The conference committee that will iron out the differences in the two bills has yet to be formed. Paull says it’s unlikely a final version of the bill would be agreed on by both House and Senate before Congress adjourns for its summer recess at the end of July. She expects the law to be finalized during the fall.
“It’s like betting on a horse race,” says Willowridge President Jerry Newman, one of the leaders of the lobbying effort. “Anything can happen. We’re reasonably confident that they’re on board in Washington. Are there any absolutes in this business? No.”