Tax Bill May Not Deter Hedge Fund IPOs and Quest for Top Talent
U.S. lawmakers have introduced a bill to raise taxes on “carried interest” compensation - the hefty 20% performance fees that private equity firms charge. But Wall Street’s elite isn’t taking the assault on their profits lying down. An army of high-powered lobbyists is being assembled to block the bill on Capitol Hill. In the meantime, the proposed legislation is not enough to deter another hedge fund from going public. According to top fund management execs, the hedge fund heyday will continue and more IPOs are on the horizon. And executive recruiting firm, A.E. Feldman, says this is big news for professionals seeking hedge fund opportunities.
Och-Ziff Capital Management, a $26.8 billion hedge fund, recently filed for a $2 billion initial public offering. The company follows Fortress Investment Group LLC and Blackstone Group LP in seeking to raise capital and pay off existing owners by issuing shares.
Organized as a partnership, the firms allow income to flow directly to shareholders without an additional layer of corporate taxes. The 20% fees that private equity firms collect from the profits of their investments are considered capital gains so investors pay taxes as low as 15%, substantially lower than the 35% tax rate on regular income paid by corporations.
But Congress has stepped in to ensure that rival firms, such as Carlyle Group and Apollo Management LP, think twice before copying the strategy. Lawmakers recently initiated their first major assault on the tax laws that affect hedge funds and private equity firms. According to Iowa Republican Senator Charles Grassley, Right now, some businesses are crossing the line between reasonably lowering their tax burdens and pretending to be something they’re not to avoid most, if not all, corporate taxes.
Two groups of legislators introduced bills to prevent the firms from taking advantage of the tax provision that allows investors in publicly traded partnerships to pay the 15% capital-gains taxes on their share of the firm’s income. The legislation would force the firms to organize as corporations instead of partnerships for federal tax purposes as of 2012.
Opponents of the bill say lawmakers are merely searching for new revenue sources to offset spending plans. But congressional aides say billions are potentially lost as investments are routed through offshore tax shelters. More than eight thousand active hedge funds are registered in the Cayman Islands. According to the Cayman Islands Monetary Authority, that’s a staggering 123% increase over the past five years.
But with $26.8 billion in assets under management and 700 investors, Och-Ziff remains undeterred by the assault on Capitol Hill. And at least one reason behind the firm’s move is to remain competitive in the quest for top talent. According to the registration statement, the firm says it’s going public to enable them to implement their growth strategy and continue to attract and retain the finest investment talent.
Tom Brown, deputy global head of investment management and funds at KPMG in the UK, also told Reuters that the expected wave of hedge fund IPOs is likely to continue unabated. A number of others are thinking about it or are some way down the track,” he said. IPOs are a way of spreading ownership of the business as well as the original owners cashing out.”
