Week in review, Aug. 6, 2007

PE pros testify against taxes on Capital Hill

Bruce Rosenblum

, managing director of The Carlyle Group, was among the investors who testified on Capitol Hill last week as lawmakers consider bills that would more than double the taxes on carried interest.

Rosenblum, who is also chairman of the Private Equity Council, told lawmakers that the proposal to raise taxes on private equity investment companies by more than 130% could reduce the amount of investments, lower returns for pensions funds and hurt domestic capital markets.

If the bills are passed, “there will be deals that won’t be done, entrepreneurs who won’t get funded and turnarounds that won’t be undertaken,” Rosenblum told the U.S. Congress. Also testifying was Adam Ifshin, president of DLC Management; John Frank, a managing principal at Oaktree Capital Management; and William Stanfill, a founder of Trailhead Partners.

Separate bills in the House of Representatives and the U.S. Senate propose to tax PE firms. The House bill would tax profits earned by private equity firms on long-term investments at the regular income rate of 35%. The Senate version would impose a 35% corporate income tax on private equity partnerships that launch public offerings, such as The Blackstone Group, which went public more than a month ago. Carlyle, among others, is considering a similar IPO.

The New York Times reported that a committee aide said that Blackstone chairman Stephen A. Schwarzman, the buyout chief who has become a lightning rod for criticism toward the private equity industry, declined an invitation to attend the congressional hearing. He instead referred the committee to the Private Equity Council, of which the firm is a member.

Alibaba to launch IPO, eventually

The rumors of Alibaba.com Inc. planning to file an IPO stretch back for as long as we can remember. Last week, Jack Ma, founder and CEO of Alibaba, operator of China’s largest B2B website, confirmed to his employees at the company’s annual meeting that Alibaba will soon initiate its IPO procedure in Hong Kong.

Ma said that Alibaba has already submitted an application to the Hong Kong Joint Stock Exchange Market. For a while there had been rumors about Alibaba’s IPO plans, fueled, in part, by the hire in July of Maggie Wu, a partner at KPMG, as senior vice president and CFO.

The company anticipates raising $1 billion in the IPO, according to the official China Securities Journal. The offering would occur later this quarter in Hong Kong, with Morgan Stanley serving as lead underwriter. Alibaba has raised about $107 million in total VC funding, including an $82 million Series D round in early 2004 at a $182 million post-money valuation.

Shareholders include Fidelity Investments, Goldman Sachs, Granite Global Ventures, Softbank China VC, Investor AB, Transpac Capital and Venture TDF.

Union Squares squabble over turf names

Venture capital firm Union Square Ventures has filed suit against buyout firm Union Square Partners (f.k.a. Capital Z Financial Services), for trademark infringement over the use of the similar name. The VC firm states in its lawsuit that at least one LP and an entrepreneur have confused the two firms.

The VC firm has used the name since 2003 when it began to raise a $125 million early stage fund to invest in IT-enabled services in the media, financial, health care and telecom sectors. In its legal response to the court, Union Square Partners says it has been using the similar-sounding name since early 2006. The firm is currently raising a $500 million buyout fund to invest in the insurance and financial services industries.

While the buyout firm could have chosen a more original name when it rebranded itself, this is not the only example of a PE and a VC firm sharing common monikers.

Examples include Cardinal Ventures and Cardinal Partners; Saratoga Ventures and Saratoga Partners; Access Capital and Access Venture Partners; to name a few. However, none of these firms are within spitting distance of each other. New York-based Union Square Ventures and New York-based Union Square Partners are located less than one-quarter mile from one another, according to Yahoo maps.

Bankers bailing on TXU?

Shareholders for Texas Utilities should hold on to their proxy postage, as the company’s $45 billion buyout could be on the verge of collapse.

As reported by Thomson Financial (publisher of PE Week), banks, led by Citigroup, are thinking long and hard about reneging on their $37.2 billion in debt financing commitments, which included $25.9 billion in term loans and $11.3 billion in an unsecured bridge loan. Such a move would likely require the banks to pay a $1 billion breakup fee, not to mention possible legal recriminations and the breach of trust with equity sponsors Kohlberg Kravis Roberts & Co. and TPG. Moreover, it’s not even clear that the lenders could make such a decision unilaterally, or if KKR and TPG would have to accede (which would be unlikely).

In addition to Citigroup, banks involved in the deal include Lehman Brothers, J.P. Morgan, Goldman Sachs and Morgan Stanley.

The $1 billion breakup fee would obviously be a bitter pill for the bankers to swallow, but Citigroup apparently is weighing it against the possibility of post-deal losses due to continued credit spread widening. As Thomson reports: “One observer pointed out that the break-up fee would be cheaper than the current losses of up to 10% on traded loans and bonds for recent buyouts.”