GP stakes investing to rise with prospect of big Democratic election win

PE firms negotiating GP stakes deals are concerned about bump-ups in top individual income and capital gains tax rates, sources told Buyouts.

GP stakes deal activity is expected to grow in the final months of 2020 as general partners fret the tax implications of a Democratic Party wave in the November elections.

GP stakes funds in deal talks with private equity firms are hearing concern about the potential impact of major tax reform if the Democrats win both the White House and the Congress, two persons with knowledge of the matter told Buyouts. To guard against this, some deals slated to close in 2021 will be moved up.

“We’re seeing a lot of transactions that might need to close before the end of 2020,” one person said. “This happens whenever tax changes come into play. The same thing happened in 2016.”

Managers looking to advance closings have typically been in negotiations with GP stakes funds for several months, many of them since before the health crisis, one source said. He estimates that about 20 percent of deals-in-process may be “pulled forward” to this year.

GPs are mostly concerned about bump-ups in top individual income and capital gains tax rates, the sources said.

In his bid for the presidency, former vice president Joe Biden has proposed raising the top individual income rate to 39.6 percent, from 37 percent. For earners making more than $1 million, he is also promising to tax investment income at the same rate as wage income.

If Biden is elected, and the Democrats also win control of the Senate and the House, these and other tax policy proposals stand a good chance of being enacted.

GP stakes deals involve the sale of minority interests by PE firms to specialty investors like Blackstone’s Strategic Capital, Goldman Sachs’ Petershill unit and Neuberger Berman’s Dyal Capital Partners. In exchange for a share of income, sellers get balance sheet capital and financing for priorities, such as GP commitments to new funds and successions.

In transactions with a succession focus, founding partners are often nearing retirement and looking to monetize large ownership positions and carry interests. This makes them especially sensitive to tax rate increases.

Among large PE firms, minority capital secured in GP stakes deals is less likely to be used for a major liquidity event than it is for GP commitments to bigger offerings and growth strategies, one source said. For them, taxes will not be a primary concern.

For mid-market managers, however, tax changes could be more top of mind because their GP stakes deals often include a succession, the source said. A late-year uptick in activity might for this reason center on them.

It is possible that a Democrat-led tax reform initiative will impact a broader range of GP stakes deals, “even those where there is not a secondary proceed,” the other source said. A “whole host of things” with potential tax consequences, he said, may alter the timing of a transaction.

Several GP stakes funds are in the market with fresh offerings. Blackstone is targeting $4 billion for a second vehicle, Buyouts reported in July. After raising $3.5 billion-plus earlier this year, Blackstone could exercise an option to go higher.

Dyal is also marketing a fifth offering targeted to bring in $5 billion, Buyouts reported in August. The firm, which last year collected more than $9 billion for its prior pool, is expected to wrap up Fund V at a significantly higher total.

Action item: See the Biden-Harris campaign’s tax proposals here.