It’s not Mr. Smith Goes to Washington exactly, but about 20 secondary private equity buyers have been fighting in the halls of the U.S. Congress. And like Jimmy Stewart’s character in the Frank Capra classic, they’re winning.
With the help of attorneys and lobbyists, the group of secondary private equity buyers have managed to exempt private equity firms from a proposed tax code change that would have possibly discouraged secondary sales.
The proposed tax changes (which involve Provision 754 of the Internal Revenue Code) originally would have required private investment partnerships to document records for limited partners gained through a secondary sale. The lobbyists representing the secondary coalition maintained that having to account separately for secondary buyers would have added thousands of dollars in costs to private equity firms and harmed the secondary market by making it less inviting for public pension funds and other investors to participate.
The provision, which was passed by the U.S. 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,” says 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.”
Sutton said he first saw a draft of the bill this past fall and realized then that the issue was one that the venture capital and private equity communities would take an interest in. Soon after, a group of about 20 secondary firms came together to lobby for private equity firms to be exempt from this provision. New York-based Willowridge and Boston’s HarbourVest lead the group. PricewaterhouseCoopers has lobbied on behalf of the group with the help of the National Venture Capital Association (NVCA).
Jennifer Dowling, vice president for federal policy and political advocacy for the NVCA, says that legislators and their staff were not aware of the implications on VCs or private equity markets. “They considered it to be the correct pure tax approach and had not considered the 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 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 PricewaterhouseCoopers who led the lobbying effort. “The proposal was directed at abusive partnership transactions. But there have been no indications of any abuse in [the secondary private equity] industry or in the private equity fund-of-funds industry.”
The two bills that have passed in the House and Senate need to be reconciled in a conference committee, which is no small task in an election year. Both bills contain controversial economic elements, unrelated to the sale of secondaries, that could cause a prolonged political battle or stymie the legislation entirely. Still, those involved with the secondary coalition say that politicians and staffers alike in both parties are agreeable to their cause, and they are confident that the compromise bill will contain the preferred language of the House bill.
The conference committee that needs to iron out the differences in the two bills has not been formed. Paull says it’s unlikely the House and Senate would agree on a final version of the bill 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.”