The always yummy Abnormal Returns and Going Private have long had "behind the scenes" discussions about the nature of the alternative investment (and general investment) world. Today, unsurprisingly, the topic of taxing carry for private equity funds came up, and with it an interesting point that might have deeper ramifications than appear on the face.
Back in April, the Wall Street Journal ran a piece (subscription required) on the Blackstone IPO. In it, the Journal wonders after the "mark to market" like or "fair value" accounting Blackstone intends to use in their financial disclosures. Says the Journal:
Blackstone Group's planned initial public offering of shares is shaping up as a test case of controversial new accounting rules that could allow the buyout giant to book profits upfront on deals whose value could take years to realize.
At issue are rules adopted by accounting rule makers in February. They allow companies to book income from their investments immediately -- using estimates of what management determines to be their "market," or fair value, rather than to keep a static value of the investments on the books until the company cashes them out.
Of course, it was impossible for the Journal to resist the parallels to Enron, the observation that perhaps we haven't learned anything since 2002 and these are all valid points. Beneath this glossy surface, however, there is another question.
Doesn't this accounting treatment, coyly asked our friends at Abnormal Returns, suggest that Steve Schwartzman considers these profits "ordinary income?"
