The National Association of Investment Companies, a separate trade group, sent a letter to House Ways and Means Chairman Richard Neal this month saying that private equity funds “fuel” pension funds for city, state and federal workers, as well as support endowments and foundations.
The amount of revenue raised would be limited, with the Congressional Budget Office estimating it at $14 billion over a decade—what amounts to a rounding error in the more than $3.6 trillion in tax increases Biden has proposed.
Back in 2017, the private equity industry successfully fought off major changes in the Republican tax overhaul that year, when some in the GOP considered cutting the tax break as a way to pay for reductions elsewhere. In the end, the GOP kept the carried interest tax break intact but required that investors hold their investments for longer to get the benefit.
Falling ‘Prey’
Now, there’s wide support among Democrats to remove the tax break altogether.
“You’ve got outrageous situations with carried interest, and with other parts of the tax code that have allowed the wealthy to get wealthier,” Senator Amy Klobuchar, a moderate Minnesota Democrat, said in an interview with Bloomberg TV’s Emily Chang. “We lose money that we should be bringing in to pay for really important services—and then to make matters worse they have so much lobbying power and people basically fall prey to their lobbying efforts.”
Analysts at Goldman Sachs Group Inc. are among those penciling in a tax-and-spending package getting enacted by year-end.
“Most accept the political winds are not in their favor,” Arnold May, a partner in the tax department at Proskauer Rose LLP, said of private equity firms.
How to Adapt
Private equity advisers are beginning to think about how to adapt if the proposed tax hike is enacted. One option could be to create co-investment vehicles that would pool money put in by a firm’s fund managers along with that from outside parties to invest in companies alongside a fund that would hold client money. Proceeds from the deal could then be treated as a capital gain, the thinking goes. A more immediate idea is to accelerate carried-interest payouts before any changes go into effect.
Kevin Brady, an assistant vice president at wealth manager Wealthspire Advisors who advises private equity executives on estate planning, is talking with clients about how to minimize tax bills using charitable donations in years with big payouts. Still, he advises clients to be cautious about making any big moves before legislation is finalized.
Fund managers may also start charging more fees to minimize the impact of higher taxes, said Alexander Anderson, a partner at O’Melveny & Myers LLP. “They may try to close the gap between the current after-tax return and what happens after a change in law.”
The biggest hope: the whole tax-and-spend legislative effort falls apart over intra-party squabbles and issues unrelated to carried interest.
“There’s skepticism, number one, that they really have the support to get the larger tax reform package done,” Anderson said. “Most of my clients are sitting tight right now.”
—With assistance from Anna Edgerton and Allyson Versprille.
This article was provided by Bloomberg News.