New Tax Law Will Aid PE-Owned Companies, Study Says

PitchBook: Lower corporate tax rates and immediate write-offs will juice profits.

The revamped tax code will be a boon to private equity portfolio companies, a study by the PitchBook research group finds.

Slicing the corporate tax rate to 21% from 35% will boost free cash flow and also PE-owned companies’ enterprise value (EV), which is the market value of common and preferred stock and debt, minus cash and investments.

That in turn should increase EV/EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples, PitchBook says.

But the new tax law also will keep debt in check, according to the research firm: PE outfits will limit leverage to no more than six or seven times EBITDA. That’s because interest deductibility is now capped at 30% of EBITDA.

For more stories like this, sign up for the CIO Alert newsletter.

Still, an upside is that the Tax Cuts and Jobs Act encourages more buyouts, since asset purchases now can be expensed immediately on tax forms, as opposed to written off gradually over a number of years. This new feature of the tax code, PitchBook writes, gives “companies an immediate tax savings for investing themselves.”

By the same token, PitchBook warns that fewer exits from buyouts will occur in less than three years. Reason: That’s how long, under the new statute, that PE operators must keep a portfolio company to realize favorable long-term capital gains taxes on carried interest, the share of the profits from divesting a PE asset.

Tags: , ,

Hedge Fund Tells Kentucky Pension to Take a Hike

Davidson Kempner Capital Management takes issue with state’s code of ethics.

 

Hedge fund Davidson Kempner Capital Management has told the $17 billion Kentucky Retirement Systems (KRS) it doesn’t want its money and asked it to withdraw its $68.7 million in protest over the state’s new code of ethics.

KRS Executive Director David Eager said he was notified by the New York-based hedge fund that it didn’t want to abide by the CFA Institute’s codes of ethics and professional conduct that was part of a pension transparency bill passed by the state last year.

According to the bill, all individuals associated with the investment and management of retirement system assets, whether contracted investment advisors, board members, or staff employees, must adhere to multiple codes of ethics created by the CFA Institute, a nonprofit association of investment professionals. This includes “The Code of Ethics and Standards of Professional Conduct,” the “Asset Manager Code of Professional Conduct,” and the “Code of Conduct for Members of a Pension Scheme Governing Body.”

“We wanted to place more money with them,” Eager said, according to Reuters. “They expressed concern about the requirements of Senate Bill 2 with regards to the CFA codes.”

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

Davidson Kempner is not affiliated with the CFA Institute.

Eager also said the hedge fund was upset over a lawsuit filed in December by current and former state employees against hedge funds KKR/Prisma, Blackstone and PAAMCO for recommending high-risk investments that led to losses for the retirement system. He said that although Davidson Kempner was not a party to the suit, it was worried about facing similar suits because the plaintiffs went after hedge funds.

“There could be a problem here, but we just don’t know yet how significant it’s going to be,” Eager said. “An increased desire for transparency and accountability is being written into a lot of legislation around the country, and that is going to create difficulty in some of our efforts to establish business relationships with the people we want to.”

According to a KRS financial report from February, the system’s investment in Davidson Kempner returned 7.35% over one year, 3.6% over three years, and 6.1% over the past five years.

Eager also said that KRS is in the act of lowering its allocation in hedge funds to 3% of its assets from 10%, in part because of the high fees that accompany the investments.

State Sen. Joe Bowen (R-Owensboro), who sponsored the pension transparency bill, was unmoved by Davidson Kempner’s rejection of KRS’s investment.

“If they want to fire us because they can’t comply with the transparency and accountability standards that we’ve put in place, then that’s OK with me,” he said, according to a report from the Lexington Herald Leader.  “If these hedge funds are pushing back, that’s too bad.”

Tags: , , ,

«