Two-thirds (67 per cent) of private equity executives expect the US government’s new tax proposal on carried interest to pass, according to a study by accounting and consulting firm BDO Seidman.
Private equity executives report that the passage of the proposal, which would raise the tax on carried interest from the current 15 per cent capital gains rate to 39 per cent starting in 2011, will reduce the ability of funds to attract and retain top talent (43 per cent), dilute the competitive position of US-based private equity firms (35 per cent) and create additional administrative burdens (22 per cent).
When it comes to the current administration’s proposals to regulate the private equity and alternative investment industries, 55 per cent of PE executives believe that increased regulation will constrain the ability of certain funds and/or firms to do business, and that regulation will require cost and time that the industry cannot currently afford (26 per cent).
“Recent actions by the House Financial Services Committee suggest that fundamental changes to the PE industry are afoot. While 39 per cent of private equity executives say their primary concern in the next year is the availability of leverage, 12 per cent say they’re most concerned by these regulatory changes,” says Scott Hendon, partner with BDO Seidman’s private equity practice group. “Moving forward, it will be critical for funds to understand the impact that regulatory changes may have on their businesses in preparation for possible implementation in 2011.”
In response to market conditions, eight in ten (82 per cent) PE executives report that they are extending average exit timelines. When asked how their exit assumptions have changed, 52 per cent report an increased focus on recapitalizations and holding portfolio companies, 27 per cent report an increased focus on acquisitions and ten per cent are focusing more on secondary buy-outs. Just four per cent are increasing focus on IPOs.
Despite a frosty fundraising environment, four in ten (40 per cent) PE executives report that they are receiving new commitments from LPs. Firms say they are receiving the majority of first-time financial commitments from pension funds (36 per cent), family offices (29 per cent) and international investors (25 per cent).
“Private equity firms with a proven track record and a solid history continue to be successful in launching new funds, even in the current marketplace” adds Hendon. “That being said, many continue to face challenges in today’s fundraising environment, with 2009 fundraising being significantly below 2007 levels.”
