PE firms and hedge funds own large portions of US private companies as a long term investment, which varies from 5 to 7 years. During this period the majority owners restructure the company to increase the annual revenue stream as well as profits.
Bringing a private firm to the market in the form of an IPO can result in large payoffs for the private equity firms and most certainly when the tax climate works in their favor.
The fiscal year of 2010 may very well be their last chance to maximize the benefits from their investments as it is expected that the capital gains taxes will rise from the current 15% to at least 20% by next year.
An increase in leveraged buyout activity or LBO is expected as well during the second half of 2010 as well as a higher LBO to LBO activity. The latter represents deals between two separate LBO firms and again are subject to prevailing tax rates.
A discontinuation of the tax cuts in 2011 is expected to have a negative effect on the US economy in general and the IPO markets specifically.
A tax rate hike during a financial crisis or recession has an adverse effect and affects all US tax payers through income taxes, dividend taxes or estate taxes.
PE firms and hedge funds are trying to benefit from a more favorable tax environment while they can but may see far less activity next year unless the US Government extends the existing tax cuts, which will prove to benefit every single working American.
Written by Nick Doms © 2010, all rights reserved