It’s almost unthinkable. For all of their buttering up of President Trump, for all of the $100,000-a-plate fundraisers, for all the good of having a Batphone connection to the Oval Office from Steve Schwarzman’s desk, private equity had lost the Great Tax Reform Robbery of 2017. There’d be limits—serious limits—on deducting all the leverage in a leveraged buyout. There’d be a new three-year holding requirement to get capital-gains tax treatment. Plus the new lower corporate tax rate means there’d be a smaller number from which to deduct one’s now-smaller interest deductions. Add in the SALT hit that most p.e. people will take from living in the habitable parts of the country, and it looked like Big Private Equity got a major-league hosedown, just like the president was telling his shit-kicking constituents in the less-habitable parts of the country.
In a speech in St. Charles, Mo., on Nov. 29 — before the tax bill had been finalized — Mr. Trump said about the proposed changes: “I have some very wealthy friends. Not so happy with me, but that’s OK….”
The private equity industry, especially the bigger firms that like to use lots of leverage to goose their equity returns, cannot be happy about these changes to the tax code.
As it turns out, no need to worry. As one might have expected from the cockroach-like survival ability of the carried-interest loophole, a tax plan that would actually hurt private equity billionaires is, in fact, unthinkable in 21st-century America.
Though the new tax law contains provisions that are inimical to private-equity firms’ interests, the positives more than outweigh the negatives, according to Hamilton Lane Inc….
The values of profitable private-equity-owned U.S. companies should climb between 3% and 17% on average as the law moves to lower the corporate tax rate to 21% from 35% and to give companies the ability to deduct capital spending upfront. Those two provisions are expected to trump the higher cost of debt that will result from the legislation, Hamilton Lane found….
Private equity “is very much a big winner out of the reform,” Brian Gildea, a managing director and member of Hamilton Lane’s investment committee, said in an interview.