- Large private-equity firms are looking to sell assets before Jan. 1 with the expectation that tax rates will increase in 2021, sources tell Business Insider.
- “It’s a very real issue on people’s minds,” said Kimberly Smith, co-chair of the global mergers and acquisitions and private equity practice at law firm Katten Muchin Rosenman.
- Under a Biden presidency, the maximum capital gains tax rate on individuals earning more than $1 million would increase from 20% to 39.6%, which would take a larger chunk out of investors’ wallets on any sale.
- Even if Trump remains in office, experts say the government will need to raise revenue through taxes to fund COVID relief plans.
- Recent private-equity sales include Blackstone exiting its 36% stake in UK insurer Rothesay Life, along with its sale of a 42% stake in Cheniere Energy Partners to Brookfield.
- Visit Business Insider’s homepage for more stories.
This story was originally published on Oct. 3.
Large private-equity firms are feeling pressure to sell assets before year-end to take advantage of a business-friendly tax regime they fear could change in 2021, attorneys and PE executives tell Business Insider.
The thinking is that if Joe Biden is elected president and there is a Democratic majority in Congress, it will unleash a wave of larger taxes on corporations and wealthy individuals who manage them.
Under Biden’s plan, he intends to increase the corporate tax rate from 21% to 28%, as well as nearly double the long-term capital gains maximum tax, from 21% to 39.6% for individual taxpayers earning more than $1 million.
But even if Trump remains in office, experts said that taxes may very well increase so that the government could fund COVID relief efforts.
“The fiscal relief that was passed as part of the CARES Act was substantial. And then there is discussion on more relief packages, which are very large in size,” said Rebecca Lester, an accounting professor at Stanford business school.
“At some point there will have to be a revenue raise to pay for those.”
Insiders say possible tax hikes on carried interest are a factor when it comes to deal timing
Insiders said in early October that PE shops have been acting on the expectation of tax hikes, including taxes paid on so-called carried interest, or the gains that a fund generates after selling its investment. That means that firms are pushing to close deals already in the works before year-end.
“It’s a very real issue on people’s minds,” said Kimberly Smith, co-chair of the global mergers and acquisitions and private equity practice at law firm Katten Muchin Rosenman.
Smith, along with several other attorneys and private-equity execs, said they were not seeing asset sales come to market only because of the prospect of higher taxes in 2021, but that it’s “driving a sense of urgency” within executives already looking to sell.
Smith said she doesn’t expect the sales activity to really heat up until closer to the end of the year.
“If you had a seller that maybe was thinking he would or wouldn’t go to market in 2020 and then ran the numbers on the Biden plan, he has to pick up the phone and kick off a process. That’s still a scramble to get it done by the end of the year.”
Still, there have already been large private-equity asset sales capturing the headlines over the past two months.
That includes this week’s announcement that Blackstone would sell its 36% stake in UK insurer Rothesay Life to GIC and MassMutual, along with the investment giant’s sale of a 42% stake in Cheniere Energy Partners to Brookfield.
Another prominent sale that came in August was Intercontinental Exchange’s $11 billion acquisition of mortgage software company Ellie Mae from private equity firm Thoma Bravo. The tech investor had bought Ellie Mae in April 2019 for $3.7 billion.
The tax considerations of those transactions couldn’t be determined. And bankers and lawyers said that the deal surge is ultimately being driven by other factors outside of taxes, like the fact that private equity deals experienced a lull mid-year because of COVID-19 and are now trying to play catch-up, and that the Fed and central banks have alleviated the financial markets.
Jared Kelly, a partner with Reed Smith who advises private-equity firms, was another lawyer who said that he’s seeing “a committed push” of deal activity from some of the largest PE shops.
“There are currently multiple large deals in the pipeline that are trying to close before the end of the year,” he said, noting that corporate executives are taking potential 2021 tax obligations into consideration.
Private-equity firms such as Blackstone, TPG, Warburg Pincus, and Apollo offered no comment on deal activity that may have been accelerated by tax prospects when contacted by Business Insider in early October.
What a ‘big delta’ in taxes could mean for investor returns
The topic of taxes has long been a sensitive issue for private equity. Critics say that the firms should be paying much more for their carried interest, and Sen. Elizabeth Warren created a plan as part of her presidential run last year to impose stiffer taxes.
One private-equity insider told us that, in some deals, “it’s just time” to sell. But he noted that selling on Dec. 31 versus Jan. 1 “would be a big delta in tax leakage if you believe rates are going up.”
The difference between a 20% and 39.6% capital gains tax rate, for instance, could translate to tens or hundreds of millions depending on the size of a sale. And private-equity firms, eager to get good returns for investors — and themselves — are trying to keep those payments as low as possible.
David Gibbons, a partner with Hogan Lovells, said he wouldn’t be surprised to see an active fourth quarter.
“There are clearly some appreciated assets that capturing gains at current rates could make sense if there is a change of administrations,” said Gibbons, via email.
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