Interest Expense Deductibility - How does this affect PE firms?
Hey Monkeys,
So if I'm not wrong, Trump's tax plan either removes or seriously limits the ability for businesses to deduct interest expense for tax purposes. (If anyone knows exactly what the change is, please do share it with the rest of us).
My question to experienced folks is - how does this affect the PE business? Now I'm a noob, but I understand that PE firms take a lot of debt and the ability to deduct this is an important factor. If anyone can break it down it'll be great!
Interest deductibility limited to 30% of unadjusted ebitda. Nol utilization limited to 80% pre tax income. Capex expensed as incurred and tax rate reduced obviously. I think interest deductibility changes to 30% ebit after 2022 or something (may hurt businesses with high amortizations but few ongoing deductible capitalized expenses). You also get a perpetual carryforward for undeducted interest.
So depending on CoD, leverage, capital intensity could help or hurt. I think if pe firms own a broad mix of diversified assets should be roughly ok if not slightly beneficial..
Sb'ed! Thanks a ton
I think it's going to make the entire PE asset class extremely cautious about how they invest their capital and very focused on whether a potential downturn in a given industry is likely. For example, if a Company is limited to the amount the of interest expense they can deduct by the amount of EBITDA a comapany generates then the PE firm will be very focused on the projected EBITDA of that company. If a sector experiences a downturn and the EBITDA declines then the amount of interest they can deduct will be dramaticially lowered and thus their returns. Even if they can carry the interest deductions forward PE firms would prefer to exit in 5 - 7 years and given a downturn it would take much longer then that to make their returns back.
I'm as conservative as it gets, but i think the tax bill will make PE firms much more selective in their investments and overall hurts the industry.
Impact of interest rate deduction legislation on private equity strategies (Originally Posted: 10/30/2017)
Hey folks,
I'm trying to wrap my head around some of the proposed changes to the tax code. While passing the proposed package of legislations (lower corporate tax rate, lower pass-through rate, curtailment or elimination of interest rate deduction, immediate expensing of capital expenses) is politically tricky, I'm curious to hear opinions on what will happen to the private equity industry. Some really rough guesses that I have in mind:
(1) Lower leverage levels (~45% debt, 55% equity rather than the other way around) (2) Shift towards higher quality platform acquisitions that can raise debt at lower rates (focus on driving down acquisition multiple through add-ons) (3) Large public funds will benefit greatly from increased valuations.
What do folks think?
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