Sunday, March 17, 2013

PEU's Tentacles in IPO Tax Benefits

Dealbook reported the latest method private equity underwriters (PEU's) use to suck cash from affiliates after going public.  It's an Income Tax Receivable Agreement:

In a typical buyout, the owners make money by sprucing up the operations and selling the business to another company or public investors. Private equity firms have also found ways to profit before the so-called exit with special one-time dividends and annual management fees.

Now, buyout specialists are increasingly collecting continuing payouts from their former portfolio companies. The strategy, known as an income tax receivable agreement, has been quietly employed in dozens of recent offerings backed by private equity, including those involving PBF Energy, Vantiv and Dynavox.
One expert stated, "It’s meant to extricate cash value from taxes."  Proving PEU boys can monetize anything.  As a new shareholder I would expect the company's tax advantages post IPO to accrue to shareholder's not the selling PEU. 

That would be like me selling a house and keeping 85% of the increase in the mortgage deduction being paid by the new owner. 

A few lines in a S-1 hardly seems proper disclosure for a  multi-year tax receivable agreement worth millions.  The agreement is not arms length, not properly disclosed and reeks of fraud. 

Welcome to our world, where political parties of Red and Blue love PEU.