Debevoise PE Report: Defense Investing, New Disclosures for IPOs, and Why Your PIK May Lead to Undesirable Taxation

In its latest private equity report, Debevoise & Plimpton addresses taxes on PIK Toggles, defense investing, and IPO disclosures, among many other topics. Here is the editor’s letter; download the entire report below.

After a very long winter, the private equity industry is poised for a period of renewal. Deal activity is clearly on the uptick, the financing markets are showing signs of activity, the IPO market is no longer in the doldrums and asset allocations to private equity are no longer just a memory. The challenges facing the private equity industry are too numerous to list. In this issue, we suggest ways in which to tackle many of them.

On our cover, we remind those who financed transactions with “PIK toggle” instruments that, while cash interest payments can certainly be avoided, mandatory partial redemption
payments may soon be due. These partial redemption payments were designed to avoid adverse tax consequences, but will certainly now give rise to thorny calculation issues which were unanticipated when it was expected that the debt could easily be refinanced well in advance of its due date.

The legislative scene seems like no friend of private equity these days. We report on the recent changes to UK tax law, which will limit to some degree both the leverage available to UK companies and the advantages of repurchasing portfolio company debt. We
also report on the state of the EU’s Alternative Investment Fund Managers Directive, which is poised for passage in some form in the near term. Whether it will threaten the ability of London to continue as a private equity hub remains to be seen.

Climate change and other “green” legislation is on the legislative agenda in both the U.S. and Europe. From our London office, we herald some good news for private equity
sponsors with UK portfolio companies because the final Carbon Reduction Commitment legislation due to become effective this spring offers more options for compliance than initially
proposed. It is expected that climate change legislation in the U.S. is also forthcoming, and we offer a primer on its many sources as well as why private equity players should stay abreast of
its progress.

As the IPO market improves, we offer some guidance to those private equity sponsors who have been away from the market for a while by reviewing the new SEC disclosure requirements
relating to compensation, corporate governance and climate change.

We have previously highlighted the use of earnouts to bridge valuation gaps in unsettled markets. In this issue, we remind you that earnouts are no panacea. Two recent decisions in two U.S. circuits suggest that in order to avoid an affirmative duty to help
a seller realize the earnout payments, buyers may need to negotiate a complete set of rules for the operation of a business during the earnout period.

We also report on the challenges and opportunities of private equity investment in the U.S. defense industry. As always, we look forward to your comments and your
suggestions on what aspects of the private equity industry you would like to see featured in future issues of the Debevoise & Plimpton Private Equity Report.

Download the Debevoise & Plimpton Private Equity Report.