Interest deductibility, carry changes may get buried in bigger plans

The American Investment Council, a lobbying group for the private equity industry, intends to work with the limited-partner community on its concerns about potential rollbacks of general-partner-registration requirements, Mike Sommers, the group’s president and chief executive, said.

AIC is advocating to roll back registration requirements but also says GP-LP alignment must be maintained. LPs have told Buyouts they are pleased with the level of disclosure that has emerged from the SEC’s scrutiny of the PE industry.

“We’ll work with” the Institutional Limited Partners Association “on this issue,” Sommers said on Wednesday at Buyouts’ PartnerConnect East conference in Boston. “We’ll be working hand-in-glove going forward.”

Peter Freire, ILPA’s CEO, in a statement to Buyouts reiterated the group’s opposition to a rollback of registration requirements.

“Maintaining the level of oversight, disclosure and transparency that has been afforded to the LP community as the result of SEC registration of private equity firms is paramount to the ILPA,” he said. “Therefore, we do not support the exemption provision for private equity fund advisers included in The Choice Act.

“As the legislative process moves forward, we are committed to working with members of Congress to explore the potential for recalibrating certain requirements for registered advisers, while ensuring that crucial investor protection benefits are preserved for limited partners.”

The Dodd-Frank financial-reform act forced most GPs to register with the SEC. Registered firms are subject to SEC examinations. Those exams, which started around 2012, uncovered widespread issues around disclosure of fee-and-expense practices.

The exams led to several large firms, including Kohlberg Kravis Roberts, Blackstone Group, Apollo Global Management and First Reserve, settling with the SEC over issues of improper fee-and-expense disclosure, among other things.

Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, sponsored the Financial Choice Act, which among other things would exempt PE firms from having to register with the SEC. AIC supports that provision, Sommers said.

Private equity could also be affected by two other changes the administration supports: taxing carried interest at the higher ordinary-income rate and eliminating the tax deductibility of interest expense.

President Donald Trump supported taxing carried interest as ordinary income instead of capital gains. And House Republicans proposed a tax-reform plan under which interest expense would no longer be deductible.

Both those issues would be dealt with under the administration’s plans for tax reform.

But tax reform won’t come to the forefront until the administration finishes with other priorities, including eliminating the Affordable Care Act. The administration needs to eliminate about $1 trillion of tax increases enacted around the Affordable Care Act, Sommers said. The Republicans need to eliminate those increases before they can move on overall tax reform, Sommers said.

The elimination of those tax increases will likely pass the House but could have a problem in the Senate, he said.

“If they don’t get big healthcare reform done in this presidency, tax reform doesn’t get done,” Sommers said. “If they don’t get tax reform done, you’re looking at smaller tax cuts rather than big reform.”

The administration will also need Congress to raise the debt limit to keep the government funded and pass a fiscal year 2018 budget — all before dealing with tax reform, Sommers said.

Action Item: Contact the AIC: info@investmentcouncil.org and the ILPA: info@ilpa.org 

U.S. President Donald Trump attends the Women in Healthcare panel hosted by Seema Verma (right), administrator of the Centers for Medicare and Medicaid Services, at the White House in Washington on March 22, 2017. Photo courtesy Reuters/Kevin Lamarque