Bloomberg

Private Equity Smokes Amid Rising Taxes, Threat to Close Billionaire Loophole

(Bloomberg) – In the golden realms of private equity, where mega deals and mega payrolls await, the masters of debt buyouts are feeling a little disheartened. From Park Avenue to Palm Beach, the conversation keeps turning to the same uncomfortable subject: After years of futile threats, Washington is seriously talking about ending the tax break that has helped private equity become one of the most lucrative corners of American finance. In addition to the damage, other taxes on income and capital gains would also increase. anti-business, if not anti-American. Some expect the changes to trigger early retirement. Others are leaving New York for Florida without income tax. One is dreading to tell his children that he is moving his family to Puerto Rico; he hired a lawyer to look at the logistics. Another, outspoken, compares the developments to – its term – reverse discrimination. But a lot of money is at stake. The Internal Revenue Service characterizes the interest earned as capital gains, rather than ordinary income. That’s the difference between paying the total investment rate of 23.8%, including a levy that funds Obamacare, and the 37% rate for wages and salaries. But now the Biden administration wants to label them. two as ordinary income, thus doubling the capital gains tax for the highest earners, and meaning that this profitable advantage – the billionaire loophole – could finally disappear. The combination of rising taxes on income and capital gains, removing the reduction in interest charges and paying additional state and local taxes could push the total levies from some to 60%. And the proposed changes could add to further consideration. A Treasury Department report released Thursday estimated that the wealthy taxpayers as a group were hiding billions of dollars in revenue, reinforcing the Biden administration’s call to Congress to approve expanded IRS funding. on his industry to Adolf Hitler who invaded Poland in 1939. (Schwarzman later apologized for this remark. He declined to comment on this story). private equity. Eliminating the carried interest loophole could bring the rich about $ 15 billion over 10 years, a congressional committee says. A big spendthrift in Washington, private equity has already pushed back taxes and been spared under the president Donald Trump. This time, however, it’s different. Industry insiders say they are increasingly resigned to paying more taxes. For obvious reasons, few people want to be cited by name. Washington’s formidable Private Equity lobby, the American Investment Council, is ready to speak. He tries to convince members of Congress to protect the interests of the industry. “During this economic recovery, why would you attempt to do something that thwarts the capacity of private capital and the incentives to continually invest,” says AIC President Drew Maloney. “You’re going to have a group of policy makers who don’t want to disrupt this.” He continues, “At the end of the day, private equity wants to be treated consistently with capital gains, and let’s see how that flows and the debate unfolds. The dollar signs tell the story. Take Schwarzman from Blackstone Group Inc., perhaps the biggest name in the industry. Last year, he earned $ 78 million in carry, including securities he might sell later – most of his compensation – and $ 524 million in dividends on his stake in Blackstone. Under the Biden plan, his carry take would be reduced to $ 44 million and his dividend payout would fall to around $ 300 million. And then it would all be reduced even further by municipal and state taxes. For most seniors in private equity lands, the vast majority of compensation comes from interest, while junior employees get their wages from wages. Under the Biden deferred interest plan, the average partner of a large private equity firm, which would earn $ 30 million deferral if certain returns are met, could expect to pay around $ 13 million in taxes, compared to $ 7 million under the current system. According to a Bloomberg analysis of salary data from recruiting firm Heidrick & Struggles, for an average VP, who is likely near the 1% of top earners, he could pay up to $ 2.3 million to the IRS, for $ 1.2 million. To put these numbers into perspective, the median U.S. household income was $ 68,703 in 2019, according to the U.S. Census Bureau. The average tax rate for the previous year was 13.3%, according to the latest IRS figures. Admittedly, even some private equity players wonder if the long-protected tax configuration of their sector is fair. The founder of a private equity firm said he never thought the arrangement would last – that it was actually a giveaway from Wall Street. He’s based in Texas, which has no income tax, so it’s not quite how wealthy New Yorkers see it, whether they’re in private equity or not. New York is increasing its tax on the rich to funnel money to schools, the homeless and more. Biden, meanwhile, is seeking new taxes on the rich to pay for his plan to reshape the economy as the pandemic recedes here. Giving 60% of his income is beyond a fair share, says the veteran of the private equity which is planning its move to Puerto. Rico: Proponents of tax increases on the wealthy argue that even the smallest increase will send well-to-do New Yorkers to Florida, the so-called Wall Street South. It may already be happening. Nearly 10% of New York-area residents who moved during the pandemic fled to one of nine income-tax-free states – and most of them went to Florida, according to service data US postal service. Inc. are opening each office in Florida. One of Apollo’s co-founders, Josh Harris, is considering changing his primary residence to the Sunshine State – a move that could lower his tax burden if he starts selling his stake in the company after his planned departure the year next. The titans of the funds have moved there or have opened crossroads for staff to take the leap. Removing tax incentives that encourage risk-taking could stifle the American ingenuity that has created many of the world’s best companies, one of the industry executives said. By taxing value creation at a higher rate, you are actually penalizing those small businesses and emerging leaders who are really the engines of growth in the economy, ”said Nitin Gupta, Managing Partner of Flexstone Partners, which invests in private assets. “These small businesses backed by PEs tend to grow and hire faster.” According to Paul Gulberg, analyst at Bloomberg Intelligence, a key argument for maintaining the interest-bearing loophole is that it aligns the interests of limited partners, who invest money in private equity funds and in general partners who make deals and make investments. Changing the tax system might encourage GPs to focus more on the short term – not necessarily a good thing. And given how private equity has infiltrated virtually every corner of the country’s economy, funds might be tempted to simply pass any tax increases on to pensions. funds, collegial endowments and other investors. The big guys could consolidate their power. The little ones might find it difficult to break through. “This can make it a bit more difficult for emerging managers to compete for talent,” says Brendon Parry, managing director of TIFF Investment Management, which invests primarily in lower middle market private equity and seed capital. capital for endowments and foundations. In a business where money is the ultimate measure, everything is relative. A private equity partner admits that he is well paid. But he adds that next to the founders, he looks poor. There is not much that can seriously diminish the dizzying fortunes that have already been made. The founders of the four major publicly traded companies – Blackstone, Apollo, KKR & Co., Carlyle Group Inc. – have achieved billionaire status, according to Bloomberg. The multimillionaires are too numerous to count. And the counter-argument, of course, is that if private equity is so good at what it does, it shouldn’t need a tax loophole to make money. the industry if you’re good and it’s 43% taxed, well, ”said Elizabeth Edwards, founder of H Venture Partners, a Cincinnati-based venture capital fund. “You have $ 600 million instead of $ 1 billion. You cannot take it with you. More stories like this are available at bloomberg.com Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP



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