THE ANNUAL REVIEW 2010 - PEI Media

More documents

Recommendations

Info

page 96 private equity annual review 2010 c a r r y ta x Carrying on For decades the US has grappled with how tax authorities should treat carried interest Private equity’s growth into a multibillion dollar industry has made it a natural tax target for a government struggling to plug deficit holes. Politicians have in recent years argued over whether carry should be treated as compensation for services (federally taxed as ordinary income at a rate as high as 35 percent) or whether it represents a quasiinvestment return for fund managers, to be treated under the more tax friendly long-term capital gains rate of 15 percent. During such debate in 2009, the government estimated that more than $25 billion in tax revenue would be created by reclassifying carried interest’s tax status. Republicans – who reclaimed power in the lower house of Congress in 2011— have been able to thus far block repeated attempts to raise and reclassify the current capital gains tax treatment of carried interest. Proposals under the Democratic leadership’s most recently blocked legislative efforts would have prevented GPs from paying taxes entirely at the capital gains rate on carried interest, and under certain rules, would have treated up to 75 percent of carry as ordinary income beginning this year. For assets and partnership interests held for at least five years, the ratio would change to a 50/50 split. Not one to back down from a fight, President Obama has continued the debate into 2011 by including tax hikes in carried interest as part of his 2012 budget proposal. He will be sure to find staunch opposition from the new Republican-led House of Representatives. ■ An overview of government’s long standing debate over how tax authorities should treat carried interest 1974: US Court of Appeals rules that future carried interest is a taxable event. 1991: A similar case heard by the Court of Appeals reverses earlier decisions, saying a right to future fund profits is not in fact a taxable event. 1993: US Treasury Department and IRS adopt rules formalising the 1991 court decision. 2005: Treasury revisits the issue, reconfirming the 1993 guidelines, but proposes greater regulation on how the award of future carried interest should be valued. June 2007: Democratic congressman Sander Levin introduces bill HR 2834, which proposed treating carried interest as ordinary income instead of the lower rates provided by capital gains. The bill eventually died in committee. Similar efforts in the Senate also fail to materialise. July 2007: Senate Finance Committee investigates the issue of carried interest. The department of Treasury testifies on behalf of a capital gains tax treatment. No new immediate bills addressing carry are introduced in either chamber of Congress. February 2009: President Obama submits his 2010 budget proposal which called for treating carried interest under ordinary income tax rates. May 2010: House of Representatives votes to approve the “American Jobs and Closing Tax Loopholes Act” which would ultimately treat 75 percent of carry as ordinary income, with the remaining 25 percent under the more tax friendly capital gains rates. June 2010: Senate Republicans defeat the act in a 52 to 45 vote. September, 2010: Democratic chairman of the Senate Finance Committee Max Baucus introduces the “Job Creation and Tax Cuts Act”, which reintroduces carried interest provisions pulled from the defeated June bill. October 2010: US lawmakers go on recess without passing the tax reform package introduced by Baucus one month prior. November 2010: Republicans retake control of the US House of Representatives, potentially setting back recent carry tax reform efforts. January 2011: Assuming no action on the matter by Congress, tax cuts enacted almost a decade ago expire – raising tax rates on ordinary income and capital gains. February 2011: US President Barack Obama included in his proposed budget that Congress require GPs to pay ordinary tax rates on the profits they receive as compensation instead of capital gains.
private equity annual review 2010 pa g e 97 Leverage for sale f i n a n c i n g Last year there was a huge spike in US leveraged loan issuance, but financing was still hard to find in the mid-market, reports Graham Winfrey US leveraged buyout loan volume in 2010 was nearly seven times that of 2009, a clear indication that the lending market has reopened for business. “The [loan] market is absolutely on fire,” Charles Smith, head of corporate finance at advisory firm Loughlin Meghji & Company, told PEI in November. Standard & Poor’s recorded approximately $35.4 billion of loans for large-cap and mid-market deals in 2010, compared to just $5.3 billion in 2009. While 2010’s volume came in just under 2008’s $36.6 billion, it was a far cry from 2007’s total of $189 billion. Still, the return of lending has had a clear impact on private equity firms, many of which have recently been focusing on doing dividend and recapitalisation deals in an attempt to get money out of transactions executed in the past couple years. “The markets being on fire has created an absolute euphoria of activity around trying to get exits through dividends or recaps because they couldn’t do them through more traditional M&A sales,” Smith says. “What it also means – as it relates to the buyout business – is we are going to continue to see more and more resurgence of traditional buyout activity.” Despite the surge in leveraged loans, 2010 was still a tale of two markets in that financing was not as readily available for the mid-market as it was for large-cap companies. “Unfortunately for a lot of middle market private equity firms, a lot of the euphoria you’re seeing in the bond market and the loan market are for credits that are $50 million and above,” says Smith. “It’s only now starting to trickle down into the middle market.” Part of the reason for that was because Blechman: Gap in mid-market financing may narrow “In the lower middle market … there is confusion as to which banks and finance companies are still attracted to the market” regional banks that lent to mid-market companies in the past have retrenched in response to the economic crisis. “In the lower middle market leveraged finance space, there is confusion as to which banks and finance companies are still attracted to the market,” says Mitch Drucker, managing director at Garrison Investment Group, a mid-market-focused credit, distressed and asset based investor “We have seen some volatility in the earnings of these smaller companies, which has put pressure on their existing bank and asset based lines of credit.” Another reason banks have curtailed lending to mid-market companies is due to the regulatory issues that come along with making loans to highly levered businesses or companies with weak cash flows. “Banks don’t want to be cited by the regulators, which could hurt their capital base or their ratios, so they’re more prone to stay away from those deals where they’re concerned about any future volatility,” Drucker says. Private lending vehicles, on the other hand, don’t have the same regulatory concerns. “We look at it as a great opportunity in that market right now because of the lack of liquidity,” Drucker says. “There’s going to be a proliferation of private vehicles that look to capture that market.” That proliferation has already begun, according to David Blechman, managing director at distress- and turnaroundfocused Tower Three Partners. “I’ve seen an influx of middle market lenders,” Blechman says. “There is demand for lending into the middle market, so maybe that suggests that in 2011 those middle market companies will actually be able to get better access to capital.” ■
Page 1 and 2:
THE ANNUAL REVIEW 2010 PE portfolio
Page 3 and 4:
private equity annual review 2010 p
Page 5 and 6:
Passion for achievement. www.mvisio
Page 7 and 8:
1119 The answer, my friend, is blow
Page 9 and 10:
Actis is a private equity investor
Page 11 and 12:
ENGINEERING SUCCESS Kuwait Pakistan
Page 13 and 14:
page 10 private equity annual revie
Page 15 and 16:
This announcement appears as a matt
Page 18:
Page 21 and 22:
Page 23 and 24:
INSIDE THE LIMITED PARTNER A COMPEN
Page 25 and 26:
Page 27 and 28:
Page 29 and 30:
Page 31 and 32:
10 Ten Top Years for Clifford Chanc
Page 33 and 34:
Alex Cho Investment Solutions Asia,
Page 35 and 36:
Winners Equity 2001, 2002, 2003, 20
Page 37 and 38:
www.capvis.com 2010 Thank you! For
Page 40 and 41:
Page 42 and 43:
Page 44 and 45:
Page 46 and 47:
Page 48 and 49: page 46 private equity annual revie
Page 72 and 73: Capital purSuit! Putting the fun ba
Page 78 and 79: Lexington Partners is a leader and
Page 80: page 78 private equity annual revie
Page 83 and 84: private equity annual review 2010 p
Page 91 and 92: 2010 North America themes 90 First
Page 97: private equity annual review 2010 p
Page 101 and 102: 2010 Europe themes private equity a
Page 107 and 108: Gimv is a listed investment company
Page 109 and 110: 2010 Emerging markets themes 108 As
Page 122 and 123: page 120 private equity annual revi
Page 130: page 128 private equity annual revi
show all

THE ANNUAL REVIEW 2010 - PEI Media

Create successful ePaper yourself

Delete template?

Save as template?