| BERLIN, March 1
BERLIN, March 1 Executives from some of the
world's largest buyout funds said on Wednesday they were hoping
for lenient treatment in tax reforms spearheaded by U.S.
President Donald Trump.
The new administration in Washington has said it wants to
reform tax rules that could lead to higher bills for private
equity firms and their managers.
"Trump is very accessible for business. He is very
accessible for private equity. I have met him before and after
he was elected," Carlyle Group LP co-founder David
Rubenstein told Reuters at the sidelines of the industry's
annual gathering, the SuperReturn private equity conference.
The investment firms are concerned most about two tax
issues: higher taxation of their performance fees known as
carried interest, and removing the benefits of debt interest
expense tax deductibility.
The way in which the share of profits from an investment
paid to managers of private equity funds – generally among the
richest Americans – is taxed, has been a U.S. political issue
for years and made headlines in the election campaign.
The current carried interest tax arrangement allows partners
at private equity funds to treat their profits as capital gains
rather than ordinary income, and pay a rate of about 20 percent.
That compares with a rate of up to roughly 40 percent for top
Efforts to change the tax treatment nationally have failed
to gain traction for nearly a decade. But both Trump and
Democratic presidential candidate Hillary Clinton vowed in the
election campaign to close the loophole.
The planned inclusion of private equity tycoon Wilbur Ross
in Trump's new administration as commerce secretary and the
appointment of Blackstone's CEO Steve Schwarzman as head of a
new council to advise Trump on job creation has raised the hopes
of some investment managers of being heard when taxation reform
Top executives from KKR & Co LP and Cerberus Capital
Management LP have also been among recent White House visitors.
The private equity industry argues the current tax system
encourages the kind of risk-taking needed to grow companies, and
its lobby group the American Investment Council has spent
millions trying to influence lawmakers to retain the status quo.
"Keeping the entrepreneurial incentive is a good thing,"
Critics point out that private equity managers largely
invest other people's money rather than their own. Funds
collected from investors such as pension funds usually make up
90 percent or more of the money a private equity manager puts to
At the same time, the private equity partners usually take a
cut of 20 percent on any profit they make in selling an asset
after having restructured and grown it, which is then taxed
using the lower capital gains rate. Unrelated to performance,
they book a management fee of typically two percent annually of
assets under management.
"Expertise and talent (in managing a fund), no matter how
great is a service," said John Hooker from the Patriotic
Millionaires, a group of 200 wealthy Americans lobbying to close
the carried interest loophole.
"Every other American in this country is taxed for their
services, or labor, as ordinary income. That is what carried
interest is, or should be - ordinary income," he said earlier
Many private equity managers, General Atlantic's William
Ford, believe that the days of the current treatment are
"We've had 5-10 years extra time... I think it's the most
likely (change) tomorrow."
Trump and Republican lawmakers' plans to slash tax rates for
U.S. companies but at the same time end the deductibility of
interest payments in the calculation of a company's tax bill
is an even bigger concern to some private equity managers.
The likes of Blackstone, KKR and Carlyle typically finance
acquisitions with two thirds in debt, meaning that disallowing
the deduction of interest payments for tax purposes would
directly weigh on their profits.
"It will absolutely change the calculus for private equity,"
said Ares Management LP co-founder Michael Arougheti.
The impact would, however, likely be mitigated by a lower
corporate tax rate that Trump has promised.
"The net effect could be positive," said KKR manager
(Reporting by Arno Schuetze and Dasha Afanasieva in Berlin;
editing by John Stonestreet)