Deals

Study: GPs anticipate carry tax hike will hamper success

A majority of US GPs expect carry to be taxed at an increased rate of 39.6%, which will hurt their ability to attract and retain talent, according to a recent survey.

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General partners believe the US government is going to raises tax on carried interest and that the measure will harm firms' human capital.

US President Barack Obama’s proposed budget, which has not yet received final approval, includes a carried interest tax hike that would begin in 2011.

The private equity industry has been fighting against such carried interest tax proposals for several years, but the issue continues to surface on Capitol Hill.

“The carried interest provision is probably the most lobbied tax provision that I have seen since 1986,” Mel Schwarz, legislative affairs partner in the US National Tax Office of global accounting firm Grant Thornton, said back in December 2007. He cautioned, however, that “once one of these things comes on the table, it's very difficult to get it off the table. You can beat it back, but anytime [legislators] are looking to raise revenue, it's going to come back.”

About 67 percent of more than 100 general partners surveyed by accounting firm BDO Seidman believe the government’s proposal to change tax treatment of carried interest from a personal gains tax, a rate of 15 percent, to an ordinary income tax, a rate of as much as 39.6 percent, will pass.

It will be critical for funds to understand the impact that regulatory changes may have on their businesses in preparation for possible implementation in 2011.

Scott Hendon, partner at BDO Seidman’s private equity practice group
Significantly, 43 percent of those GPs believe the new tax will impede their ability to attract and retain talent, 35 percent believe the tax will weaken the competitive position of US private equity firms and 22 percent said the tax would create additional administrative burdens.

“Recent actions by the House Financial Services Committee suggest that fundamental changes to the PE industry are afoot,” Scott Hendon, partner with BDO Seidman’s private equity practice group, said in a statement. “Moving forward, it will be critical for funds to understand the impact that regulatory changes may have on their businesses in preparation for possible implementation in 2011.”

The study also found that 82 percent of respondents were extending their average exit timelines. Also, four out of 10 respondents reported receiving new commitments from LPs despite the anemic fundraising environment. Firms are receiving new commitments from pension funds, family offices and international investors, the survey found.

About one of six respondents expect one or more of their portfolio companies to declare bankruptcy in the next 12 months, the survey found.

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