“It’s clear from a seller’s perspective—whether family-owned or private equity sponsor-owned—that there is increasing debate,” said Rick Landgarten, the global head of health-care and real estate advisory teams at Barclays Plc, said in an interview. They’re asking “‘Can I get done this year? Because I expect sometime later this year or early next year for there to be tax-rate increases.’”
Calling Lawmakers
The irony is that Democrats haven’t even coalesced around a plan yet.
President Joe Biden has proposed raising the capital-gains tax rate to 39.6% from 20% for those earning $1 million. But any such measure almost certainly faces months of negotiation before it could be passed. More than 20 House Democrats from high-tax states have threatened to reject Biden’s tax plans unless they also address the so-called SALT cap imposed under President Donald Trump. And recently, a new debate has broken out among Democrats over whether to also seek an even more controversial wealth tax.
Meanwhile, company owners are eager for certainty—pressing tax experts, bankers and even their congressional representatives to specify how much higher tax bills will jump if they wait to sell in the future. Many are concerned that Democrats might thwart such an escape anyway, by making any capital gains tax hike retroactive. Biden’s proposal assumes the increase would be retroactive to late April, when it was proposed. But it’s unclear whether Congress would approve such a measure.
“Frankly, just the volatility of the tax discussion—what will pass, when will it pass, whether it will be retroactive—is making it hard to drive the boat when you are not entirely sure what each of these entrepreneurs should do and how they should plan,” Brad Bernstein, managing partner at private equity firm FTV Capital, which specializes in working with founders of fintech businesses.
Some are floating alternative tax strategies.
Private equity funds could, for example, decide to take portfolio companies public and then have the general partners collect their performance fee, known as the carry, in shares, said Bernstein. That would put off capital gains and income taxes until they sell their stock.
Another approach for company owners is to trigger a tax bill this year, such as by moving abroad and renouncing U.S. citizenship or engaging in other transfers that constitute a deemed sale, said David Lesperance, an international tax and immigration adviser at Lesperance & Associates. The idea is to pay taxes before rates rise, giving owners more time to arrange a sale with optimal terms.
Eager Buyers
To be sure, there are many factors contributing to talk of deals. The stock market is near an all-time high, burnishing valuations of private companies. Buyout firms are loaded with dry powder for takeovers after the pandemic. Blank-check firms known as SPACs, which flooded into the stock market in the past year, are under pressure to find desirable takeover targets. Low interest rates also make it easier for companies to finance strategic acquisitions. And investor interest in IPOs remains robust, behooving private equity firms to unload holdings before it softens.
About 65% of the private equity executives surveyed by EY in February and March expect changes in tax policy to have an impact on the timing of their exits.
“We’ve seen a strong resurgence in exit activity overall,” Pete Witte, EY global private equity lead analyst, said in an interview. “As we go into the balance of the year, the tax piece will be particularly important here as well.”
This article was provided by Bloomberg News.