The world’s largest private capital firms have sidestepped income taxes on more than $1tn in incentive fees since 2000 by structuring payments to incur lower levies, according to a report by the Financial Times citing new research from Oxford University. 

Ludovic Phalippou, a professor at Oxford’s Saïd Business School, authored the report — “The Trillion Dollar Bonus of Private Capital Fund Managers” — which covers private investment strategy groups including buyout firms, venture capital, infrastructure and distressed debt. 

Phalippou’s findings come as performance fees face renewed calls to address what prominent politicians deem a “loophole.” The tax savings amount to hundreds of billions of dollars at current rates, with fees taxed at long-term capital gains rates—substantially lower than income tax rates. Publicly traded firms often distribute up to half of these fees to shareholders as dividends.  

In an interview with the Financial Times, Phalippou said: “All governments are discussing taxing carried interest. My role is to provide the best estimate of the amount. 

“It shows the upper bound of potential tax collection if countries coordinated to tax that pot. Understanding the magnitude explains why private equity is a major donor to politicians and universities.” 

Phalippou calculated that Blackstone, the world’s largest alternative asset manager, earned $33.6bn in carried interest—the most of any single firm. The firm’s chairman and CEO Stephen Schwarzman and president and COO Jonathan Gray have since become multibillionaires, making them influential political donors to Republican and Democratic lawmakers, respectively. 

Last month, Schwarzman declared his support for Trump’s re-election campaign and plans to fundraise among peers. 

KKR & Co has secured a private credit loan of approximately AUD500m ($331m) from Blackstone and Goldman Sachs Asset Management to help finance its purchase of Perpetual’s corporate trust unit, according to a report by Bloomberg.

The report cites unnamed sources familiar with the matter as revealing that the financing, which is structured as a covenant-lite unitranche deal, combines senior and junior debt without financial covenants and carries an interest margin in the mid-500 basis points range.

Perpetual recently announced KKR’s agreement to purchase its wealth management and corporate trust units for AUD2.175bn. This transaction underscores the growing role of the $1.7tn global private credit market in mergers and acquisitions amid high interest rates and decreased risk appetite from traditional lenders.

KKR is also securing separate financing for the wealth management businesses, leveraging around four times their earnings.

Distressed debt levels at private equity-owned companies have surged amid persistent high interest rates, with the amount owed by portfolio companies of the world’s 50 largest PE firms up 18% since mid-March to $42.7bn, according to a report by Bloomberg citing rankings from Private Equity International.

With the PE industry loaded up with companies acquired during a period of low interest rates, industry leaders including Apollo Global’s Scott Kleinman and Steve Wilkinson, a managing director at S&P Global Ratings, addressed the subject at the recent SuperReturn International conference in Berlin.

Kleinman noted that investors will have to navigate a difficult period, while Wilkinson highlighted that capital structures that were feasible in a low-interest-rate environment are now challenging to maintain, especially for highly leveraged companies struggling operationally.

Leveraged loans, a preferred financing method for private equity buyouts, have increasingly contributed to the distressed debt market. As of 7 June, leveraged loans constituted 15.6% of Bloomberg News’ distressed debt tracker, up from 13.6% at the end of February.

With a sluggish M&A market, PE firms are finding it harder to exit investments, extending the retention period and increasing the burden of managing portfolio companies’ debt amid rising borrowing costs. Bank of America strategists noted that the new leverage level in buyouts is closer to four times earnings, half the level before the interest rate hikes.

The vast majority of limited partners are expecting to either increase or maintain their allocations to private markets investments over the next year, according to Coller Capital’s semi-annual Global Private Capital Barometer.

The 40th edition of the barometer, which captured the views of 110 private capital investors from around the world who oversee a combined $2.1tn in assets, revealed that around one in three (31%) expect to increase their target allocation to alternative assets in the next 12 months, while three in five (59%) expect allocations to remain the same.

Investors are most likely to increase their target allocation to private credit (45%), with around one third expecting to increase their allocations to infrastructure (33%) and private equity (31%). In a signal of investors’ desire for further diversification and liquidity, 38% of those surveyed say that they expect to increase their allocation to private markets secondaries.

The expected increase in allocation to alternative assets reflects investor optimism about distribution levels, notably in private equity. Some 86% of investors say that they expect to receive an increase in distributions from private equity managers in 2024 compared with 2023. This rises to 95% and 91% for investors in Asia-Pacific and North America respectively, compared to 77% for those in Europe.

According to the barometer, investors have benefited from the private equity asset class as a whole in recent years, with 62% of saying that their PE portfolio has generated annual net returns of 11–15% since they began investing. Almost a third (29%) say that their private equity portfolios have delivered annual net returns of over 16%.

In a press statement, Jeremy Coller, Chief Investment Officer and Managing Partner of Coller Capital, said: “These findings are a huge vote of confidence for alternative assets. LPs stand ready to not just maintain their allocations but to actively increase them as they seek attractive, long-term risk adjusted returns. Nowhere is that clearer than in private market secondaries, where LPs have seen the diversification and liquidity on offer.”

Investors have mixed views on the increased use of NAV finance in the private equity industry, but appear to recognise that it is here to stay. While 57% of investors say that they are not comfortable with it, 48% believe general partners are likely to use NAV financing in the next 12-18 months.

There has been an industry trend of consolidation since 2021, and investors expect this to

Private multi-asset alternative investment firm Bain Capital is to acquire PowerSchool Holdings, a provider of cloud-based software for K-12 education, in a transaction valuing the business at $5.6bn.

Under the terms of the agreement, PowerSchool stockholders will receive $22.80 per share in cash upon completion of the proposed deal. The per share purchase price represents a premium of 37% over PowerSchool’s unaffected share price of $16.64 as of 7 May 2024, the last trading day prior to media reports regarding a potential transaction.

According to a press statement, PowerSchool supports over 55 million students and over 17,000 customers in more than 90 countries. The company will remain a standalone company, and its business operations and customer service will continue to function.

Vista Equity Partners and Onex Partners will continue to have minority investments in PowerSchool.

Goldman Sachs & Co and Kirkland & Ellis are advising PowerSchool. Centerview Partners and Freshfields Bruckhaus Deringer LLP are advising the special committee of the PowerSchool board of directors. Ropes & Gray are advising Bain Capital.

Debt financing for the transaction will be provided by Ares Capital Management, HPS Investment Partners, Blackstone Alternative Credit Advisors, Blue Owl Credit Advisors, Sixth Street Partners and Golub Capital.

Private equity leaders are cautioning that the industry is likely to face years of lower returns as they work to sell off assets accumulated during the investment boom of the coronavirus pandemic, according to a report by the Financial Times.

Following a period of rapid growth and record fundraising, buyout groups are now challenged with exiting investments in unsold companies worth trillions of dollars. Many of these deals were made during the low interest rate and high market valuation period of 2021 to 2022.

The report quotes Pete Stavros, KKR’s co-head of global private equity, as saying at the SuperReturn industry conference in Berlin: “During that period, rates were low and valuations were high. These are going to be tough vintages. They’re probably going to underperform.”

As well as navigating the challenge of selling off over $3tn worth of companies as they look to investors, fund managers are also sitting on $3.9tn of un-deployed capital, or “dry powder,” according to a mid-year report from consultancy Bain & Co.

Executives at the conference suggested that the industry needs to adapt by focusing on deals where funds can drive operational or strategic improvements to generate profits. This includes deals such as carving out divisions from larger companies or investing in founder-owned businesses.

Marc Nachmann from Goldman Sachs emphasised that the industry’s previous model of paying high prices for companies using cheap debt and selling them at higher prices within a few years “won’t work in the next 10 years.”

The SEC has suffered a major setback in its bid to increase oversight of the private equity and venture capital industry after a US appeals court threw out a new rule requiring managers to provide investors with fees and expenses each quarter.

On Wednesday, a three-judge panel of the US 5th Circuit Court of Appeals in New Orleans agreed unanimously with six private equity and hedge fund groups who had argued that the the SEC exceeded its authority by adopting the rule in August. The judges accepted their stance that the rules weren’t necessary for “highly sophisticated” private fund investors.

According to an SEC spokesperson, the Commission is now reviewing the court’s decision before deciding on its next step.

In addition to quarterly fee disclosures, the SEC rule, which also applied to hedge funds and managers of funds for institutional investors such as pension funds and endowments, prohibited firms from grating preferential terms over redemptions and special access to portfolio holdings to some favoured investors.

Industry bodies have welcomed the court ruling with MFA President and CEO Bryan Corbett describing it as “a significant victory for markets, fund managers, and investors”.

“The court affirmed that the SEC cannot expand its authority beyond what Congress intended.” He said in a statement. “Unfortunately, this is just one instance of SEC overreach as it looks to push through the most aggressive agenda in decades. MFA will continue to work constructively with the SEC to help improve its rushed rulemakings, and we remain focused on enabling alternative asset managers to raise capital, invest it, and generate returns for their beneficiaries.”

Funds managed by private investment firm Apollo Global Management are to lead an investment of $11bn to acquire a 49% equity interest in a joint venture entity related to Intel’s Fab 34 chip manufacturing facility in Leixlip, Ireland.

The deal represents Intel’s second Semiconductor Co-Investment Program (SCIP) arrangement, which is part of the company’s Intel’s Smart Capital strategy, a funding approach designed to “create financial flexibility to accelerate the company’s strategy, including investing in its global manufacturing operations, while maintaining a strong balance sheet”, according to a press statement.

Fab 34 is Intel’s high-volume manufacturing (HVM) facility designed for wafers using the Intel 4 and Intel 3 process technologies. To date, Intel has invested $18.4bn in Fab 34.

Under the agreement, the joint venture will have rights to manufacture wafers at Fab 34 to support long-term demand for Intel’s products and provide capacity for Intel Foundry customers, with Intel holding a 51% controlling interest.

The transaction is expected to close in the second quarter of 2024.

Private credit investor Pemberton Asset Management is partnering with the Abu Dhabi Investment Authority (ADIA) to raise at least $1bn to provide net asset value (NAV) loans to private equity firms, according to a report by Bloomberg.

In a statement Pemberton said the new strategy will provide buyout firms with capital that will help them increase their commitments or do bolt-on acquisitions, with ADIA set to anchor the strategy, which is expected to close in the coming weeks.

NAV financing, which allows managers to layer more leverage on their funds late in their cycle on top of loans taken out by many managers when they first acquire a company, has grown in popularity in recent years as PE firms look to raise cash in a challenging exit environment.

NAV lending is usually executed either via loans against the net asset value – typically less than 25% – of a portfolio, or preferred equity.

The report cites Symon Drake-Brockman, the veteran debt banker who founded Pemberton in 2011, as saying that the fact that that ADIA is anchoring the strategy is proof that NAV loans are on their way to becoming a key financing tool in private markets.