January 6 () – TPG’s top dealers are forcing the buying firm to pay the cash value of the tax savings it expects, currently valued at $ 1.44 billion, where in the years following the initial public offering (IPO) , indicates the regulatory submission.
Blackstone Inc. has been popular among buying firms since its IPO in 2007. Critics argue that this deprives their public shareholders of the value they should have.
Robert Wilens, a tax expert and finance professor at the Columbia Business School, said IPO investors may not be able to fully assess how much value a private equity firm is transferring to its founders because of the complexity of the process.
“Public investors can overpay for stocks, and it’s hard to understand the consequences,” Villens said.
A TPG spokesman declined to comment.
TPG tax breaks arise as a result of its reorganization. In pursuing the interests of its founders in its operational partnership, TPG expects to increase the tax base, which will allow it to receive depreciation and amortization deductions, which will reduce taxable income.
The TPG entered into a “tax payment agreement” with its founders to pay 85 percent of the cash value of these tax funds, the application said.
The Texas-based firm Fort Worth said the $ 1.44 billion value could “make a significant difference” until tax savings are realized. He added that he expects the payments he will have to make under the deal to be “large” and that they could have a “material negative impact” on his cash position.
On Tuesday, TPG said it expects $ 9.5 billion in its IPO, so the tax receivable deal will give about 15 percent of that value to TPG’s top dealers, primarily founders David Bonderman and Jim Coolter and CEO John Winkelried.
Bonderman and Coolter are already billionaires, and the $ 1.44 billion payout will further increase their wealth. Forbes estimates Bonderman and Koulter’s fortunes at $ 4.5 billion and $ 2.6 billion, respectively.
If the funds are not sufficient to make timely payments under tax receivable agreements, TPG will be charged interest at the rate of one year LIBOR plus 5%. And if the control is changed, for example, if its founders give up their two categories of shares, the TPG will owe them the remaining estimated value of the tax savings.
This happened in the last two years when the founders of peers KKR & Co Inc, Apollo Global Management Inc. and Carlyle Group Inc. relinquished voting control, turning firms into corporations with a single category of shares.
This led to a $ 560 million tax receivable agreement for the founders of KKR, which the New York-based firm said it would pay in stock.
When Apollo’s founders and executives announced last year that the firm would dismantle its two-tier structure, its tax receivables agreement was similarly enforced for at least 584 years over four years. million dollars, regulatory documents show. Leaders chose to receive the payment in cash rather than Apollo shares.
A source familiar with the matter said the payment was only half the value of the tax benefits accrued to the founders who agreed to give up the remaining half for the benefit of Apollo shareholders.
Carlisle was the first of the major private equity companies to be included in the list of major states deprived of the right to vote exclusively for its executives in 2019. The change resulted in Carlisle executives paying $ 346 million in cash over five years under a tax receivable agreement.
The use of tax receivable contracts by private equity firms caught the attention of U.S. lawmakers in 2007 when Blackstone revealed in its IPO applications that its executives could receive a total of $ 863.7 million in tax breaks over the next 15 years under the agreement.
However, the U.S. Congress has never passed any proposed legislation that would take these payments as ordinary income under tax payments agreements. The use of tax contracts on receivables has become popular, and some private equity companies have used them to extract value from portfolio companies.
“Private equity companies often use expensive tax lawyers for their portfolio companies. So it’s not surprising that they use tax fraud for their own direct benefit, ”said Ludovic Falippou, a professor of finance at Oxford University’s Said Business School. (Chibuike Oguh’s interview in New York, edited by Greg Rumeliotis and Matthew Lewis)