In August, US President Joe Biden's Inflation Reduction Act (IRA) was signed into law, and it was a significant political win for the private equity industry. The act had originally threatened to remove a tax loophole on carried interest—a major source of profit for GPs—but instead, investors walked away with tax relief.
Carried interest is the cut—normally around 20%—that GPs get on the money returned to investors. Under current law, a loophole allows these gains to be taxed at the long-term capital gains rate, which is capped at 23.8%. Previous acts have extended the required holding period for some assets before this rate can be claimed.
The IRA originally had provisions to remove the loophole altogether, but they were removed at the last minute after Democratic senator Kyrsten Sinema—a beneficiary of successful PE lobbying—refused to back the bill until it was amended. For now at least, the loophole is safe. But the attempt to close it is just one pitched battle in a larger war being fought by regulators and lawmakers to rein in an industry that now has outsize influence on the global economy.
This article appeared as part of The Weekend Pitch newsletter. Subscribe to the newsletter here.
In many ways, private equity has been a victim of its own success. In the past four decades, the asset class has morphed from a niche strategy into a juggernaut of American capital. Meanwhile, the most recent figures from the American Investment Council estimate that private equity activity accounts for roughly 6.5% of US GDP.
At the same time, as the industry has matured, relationships between some of PE's biggest players have become increasingly intertwined to such an extent that it has raised fears of anti-competitivness. The bitter rivalries that once defined PE's barbarian buyout era have evolved into partnerships, and lawmakers have started to notice.
Indeed, the current administration's reaction has been to pick a team of high-ranking officials who have been hawkish in cracking down on the alternatives industry. Among them are Jonathan Kanter, the new head of the Department of Justice's antitrust division; the new chair of the Federal Trade Commission, Lina Khan; and Tim Wu, who advises the White House on competition policy.
Kanter, for example, has previously vowed to take a tough stance on firms rolling up large parts of the US economy through add-on deals—an increasingly popular practice—stating that the strategy is "very much at odds" with competition. The DOJ also plans to pay close attention to situations in which PE buyers look to acquire businesses that companies have been ordered to divest to satisfy competition regulators.
Both the DOJ and the FTC are making plans to increase disclosure requirements on pre-merger notification forms as part of an overhaul of merger guidelines. In short, PE takeovers that have traditionally faced less scrutiny than large corporate acquisitions could be facing the same level of oversight.
But the scrutiny goes beyond dealmaking. Earlier in the year, the SEC revealed it would be seeking to compel PE firms to disclose their quarterly performance and fees charged to investors. Law firm White & Case recently described the move as the biggest step the SEC has taken to expand oversight on private equity since the Dodd-Frank Act in 2010.
The question is whether tighter regulations and oversight will be the new normal for the industry. Will Biden's efforts to bolster oversight of PE outlive his presidency? It's hard to tell. Battle lines over the issue are no longer reliably drawn along partisan lines.
After all, Donald Trump introduced limits on the loophole in the Tax Cuts and Jobs Act of 2017, while Democrat Sinema insisted on preserving it in the IRA. There's no guarantee that a new administration would be more accommodating of PE interests.
Featured image by Chloe Ladwig/PitchBook News
This article originally appeared on PitchBook News