The Blackstone Group's initial public offering may face a significant devaluation after lawmakers introduced a bill this week that could drastically curb private equity income. Senators Max Baucus and Charles Grassley proposed a bill late Thursday that would tax as corporations all partnerships that derive the majority of their income from managing the assets of others. If the bill succeeds, it would bring their effective tax rate to approximately 45 percent. This could decrease the IPO's $40 billion valuation by as much as 15 to 20 percent.

Private equity groups experience great tax benefits that many see as unfair. Not only are they taxed as partnerships (lower on the tax bracket than corporations), but managers are also able to pay themself something known as "carried interest", which is taxed at the capital gains tax rate instead of the ordinary tax bracket. These factors lead to drastically lower taxes than one might expect from groups pulling in so much money, which caught the attention of many lawmakers.

Shortly after, all eyes were on Fortress Investment Group when they became the first private equity firm to go public. Now it appeared as if these partnerships could not only get away with paying lower taxes but also get away with using a partnership structure as a public company! This enabled private equity firms to offer liquidity and higher valuations to their managers and partners without paying any additional taxes. Apparently this was the final straw for lawmakers - the new bill clearly adds a price tag to being a public company.

Interestingly, Blackstone and Fortress will be grandfathered in by not being forced to pay the additional taxes for another five years. However, an imminent significant tax increase in five years still puts a question mark on just how much valuations will be affected. Regardless, it will be interesting to see how Blackstone reacts and whether the apparent trend towards going public will continue for private equity.