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| New debt-equity regulations provide favorable treatment to many private equity investments |
| PitchBook Dealmakers Column
By Nick Gruidl, Partner with the Washington National Tax practice at RSM |
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In April 2016, the Treasury proposed broad and controversial debt-equity regulations designed to limit erosion of the United States corporate tax base. The final and temporary regulations issued Oct. 13, 2016, significantly improve upon the proposed regulations and place the focus squarely on certain areas in which the Treasury and the Internal Revenue Service (IRS) have viewed issuance of related party debt as inappropriate or abusive.
Under new regulations, many related party debts issued by US C corporations could be characterized as equity, thereby eliminating the tax shield provided by interest deduction on the recharacterized debt. In general, the regulations apply only to debt issued by US C corporations, so most debt issued by flow through portfolio investments would be exempt from equity recharacterization. In addition, only debt issued to another corporation (and certain controlled partnerships) is subject to characterization, so debt issued to a private equity (PE) fund or related entity that is a partnership for tax purposes is also exempt. Another PE-favorable position exempts debt issued amongst commonly controlled US corporations where the common control is held through a partnership or other non-corporate entity.
As a result, a large number of small and midsized portfolio investments will be exempt from the rules, which is a favorable outcome. However, where the portfolio investment is a multinational group with multiple corporate entities and related party debt, the new regulations are likely to require consideration.
As always, the regulations include a number of exceptions to every rule, so consult your tax advisor to determine if and how the new rules will impact your investments.
Read more on the new debt-equity regulations and how they may impact your investments.
This article represents the views of the author only and does not necessarily represent the views of PitchBook. |
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| | | | | | | Lonza to swallow pill maker in $5.5B deal with KKR |
| | KKR has agreed to sell Capsugel, a maker of drug delivery products, to Lonza Group (SWX: LONN) for $5.5 billion in cash. It's just one of a handful of billion-dollar deals in which KKR has participated so far this month, with this sale representing an EV-to-adjusted-EBITDA multiple of... |
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| | | | | | | HGGC closes billion-dollar fund, HgCapital plans its own |
| It has been a big past couple of days for private equity firms with names that start with the letters "HG."
On the west coast of the US, Palo Alto-based investor HGGC—the firm co-founded by NFL legend Steve Young—has announced... |
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• Earlier this year, GO Scale Capital led a $2.8 billion deal for the Philips Lumileds lighting unit. That deal subsequently fell apart. This week, Apollo Global Management scooped up the business at half price.
• And that wasn't all for Apollo. One of the firm's portfolio companies, retirement services provider Athene, became the second PE-backed company to raise more than $1 billion in a US IPO this year. |
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| | | | | | | | Will the maker of Oreos be the next major private equity takeover target? An update on 3G Capital’s pursuit. [New York Post]
Be nice to the people you work with. [McKinsey]
YouTube is the largest platform for children’s entertainment on Earth. What does that mean for kids? [The Washington Post]
The $1 billion price for Yahoo’s incompetence. [Bloomberg] |
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| Since yesterday, the PitchBook Platform added: | | 212 Deals | 1044 People | 484 Companies | 7 Funds |
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| 2006 Vintage US Funds-of-Funds |
| | Median IRR | | | | Top Quartile IRR Hurdle Rate | | | | 0.83x Median DPI | 1.43x Median TVPI |
| | | | *IRR: net of fees | | 97 Funds in Benchmark » |
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| Deals in Play & Announcements |
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| Bain Capital to buy Innocor |
| | Home Furnishings | Red Bank, NJ | Secondary Buyout |
| Bain Capital has agreed to acquire Innocor from Sun Capital Partners in a deal expected to close 1Q 2017. Founded in 1996 and backed by Sun Capital since 2012, Innocor designs and manufactures foam-based mattresses, pillows, furniture and other products. The company will retain its management team led by president and CEO Carol Eicher. |
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| Cortec recaps ICON to back merger |
| | Hospital Services | Denver, CO | Recapitalization |
| Alongside management, Cortec Group has recapitalized The Eye Academy of America (aka ICON Eyecare) in support of the company’s merger with Kleiman Evangelista Eye Center. Founded in 1999, ICON operates 11 ophthalmology clinics and five ambulatory surgery centers that offer eyecare procedures such as cataract surgery, laser vision correction, corneal surgery and treatments for glaucoma and retina conditions. |
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| | | | | | | Benford Capital picks up DMT |
| | Lab Equipment | Longmont, CO | Buyout |
| | | | | | | | | Clothing | Vancouver, Canada | PE Growth |
| Brentwood Associates has provided nearly $50 million in funding to SAXX Underwear, a manufacturer and retailer of men’s underwear. The minority investment comes from Brentwood's fifth flagship buyout fund, which closed on $688 million in 2014. |
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| Warburg Pincus backs UI's €600M acquisition of Strato |
| | Systems Management | Berlin, Germany | Acquisition |
| | | | | | | Stirling Square to sell ESE World |
| | Environmental Services | Maastricht, Netherlands | Corporate Acquisition |
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| Cerberus-backed Keane plans $288M IPO |
| | Commercial Services | Houston, TX | IPO |
| Keane Group, a provider of well-completion services to the US fracking industry, is reportedly seeking to raise up to $288 million through an IPO. The company plans to list on the NYSE under the FRAC ticker symbol. Cerberus Capital Management has backed the company since 2011. Earlier this year, it sponsored Keane's deal to acquire most of the US assets of Canada’s Trican Well Service for $247 million. |
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| CenterGate debut caps at $350M |
| | CenterGate Capital has hit a $350 million hard cap on its first buyout fund, according to The Wall Street Journal. The lower-middle-market investor focused on the manufacturing, business & industrial services and consumer sectors was formed in 2014 by former H.I.G. Capital executives. |
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