The fiscal cliff came and went, and now, going into 2013 it seems private equity firms across the country have two things to thank Washington for—or at least that’s one conclusion we can draw from Deloitte’s PE preview report.
For one, carried interest taxation was hardly whispered on the Hill in those treacherous hours leading up to the last-second legislating that allegedly saved America from a perilous cliff plunge. And, for another, according to the Deloitte report, PE can thank D.C. lawmakers for post-crash regulations that forced big banks to spin assets directly into their wheelhouse.
It remains to be seen whether 2013 will be kind to private equity, but the Deloitte report suggests that, at the very least, bankers supporting the sector will have a bit to work on.
“The revival of dividend recapitalizations funded by” PIK toggle bonds suggests that the bond market is healthy, the report stated, and secondary deals by which a PE firm sells an asset to another LBO shop could become increasingly popular among firms seeking exits.
Although private equity still must fear the wrath of regulators, the report suggests that LBO shops have an opportunity to take advantage of laws directed at banks.
“Many private equity firms have hired talented traders and are planning to grow hedge fund, mutual fund and even” exchange-traded funds in 2013, the Deloitte report says.
The report went on to suggest that LBO shops (perhaps like Blackstone) could expand via REITs, and that others (perhaps, such as The Carlyle Group, which just joined a consortium of PE firms in acquiring banking services firm Duff and Phelps) could make capital markets plays.
Still, not all regulation will be kind to PE. While—for now, it at least seems—PE firms are ducking a bullet via carried interest not being hitched to Capitol Hill’s cliff-dodging last-second deal, “private equity advisers will need to increasingly pursue strategies to mitigate tax risks at both the management company and portfolio company level,” the report stated.
Outsourcing back-office functions via third-party administrators will rise as firms seek—and are in other cases outright forced—to do more with less.
“Compliance-driven” investments will likely be on the rise and private equity firms “might not be prepared to manage comprehensive SEC investigations without the right level of support,” the report said, which could necessitate the involvement of outside service providers.
“Creating a culture of compliance, especially among senior executives, takes time,” the report added.
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