Inquiry on Tax Strategy for Private Equity Firms

According to The New York Times (read here), some leading private equity firms have been investigating by New York attorney general Eric T. Schneiderman whether they have used a strategy to avoid paying hundreds of millions of dollars in taxes.

In details, Schneiderman issued subpoenas to firms including Bain Capital, which was founded by Republican nominee for president Mitt RomneyTPG CapitalKohlberg Kravis Roberts & CompanySun Capital PartnersApollo Global ManagementSilver Lake PartnersClayton, Dubilier & RiceCrestview PartnersH.I.G. CapitalVestar Capital Partners, and Providence Equity Partners, to seek documents that would reveal whether they turned management fees from their investors into fund investments, which are taxed at a much lower rate (15%) than ordinary income (35%).

According to the article, the strategy, which is known as a “management fee waiver“, is widely used by buyout firms. Anyways, some firms, including The Carlyle Group and Blackstone Group, seems not to utilize the practice.

The timing of the inquiry let some Wall Street observators think that it could have a political target: Mitt Romney. Gawker recently revealed confidential tax documents for at least 21 investment funds and other entities – including some located offshore – that the Republican candidate has invested in (read here).


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