FORBES.COM NOVEMBER 30, 20 19106
THEINVESTIGATIONThe business reasons for these
stake deals are abundant. Cash is
pouring into private equity. When
new funds are formed, institu-
tions generally insist that firms
show skin in the game by putting
their own money into funds. How-
ever, liquidity can be an issue,
especially for younger firms.
These GP-stake sales free up cash,
provide permanent capital and
can help solve complex succession
issues.
But there is another factor driv-
ing these deals: skirting Uncle
Sam. Private equity already en-
joys the most absurd tax break in
America—“carried interest,” which
allows these big fund managers
to pay capital gains taxes, rather
than income taxes, on their profit
bonuses, on the idea that their in-
tellectual contributions should be
treated equally to the profits made
by their investors. Carried inter-
est has been a lightning rod with
politicians for years. In 2016 even
Donald Trump decried carried in-
terest, which basically lets private
equity executives pay a lower tax
rate than many wage earners. But
Washington has yet to curtail its
widespread use (Blackstone’s Ste-
phen Schwarzman famously com-
pared President Obama’s effort
to eliminate carried interest to
Hitler’s invasion of Poland), and it
again survived the most recent tax
reform bill.
But these new deals go further.
They effectively transform the 2%
management fees (separate from
the standard 20% profit participa-
tion) from ordinary income into
capital gains, as well. How? Take
Gores as an example. In selling
his minority stake to Dyal, he also
gave that firm a right to a portion
of his management fees. Voilà: a
stream of ordinary income be-
comes a windfall of capital gains,
reducing the maximum rate of
37% to 23.8%—and potentially de-
ferring that tax payment for years.
“The official story [to limited
partners] has always been we
don’t make any money on man-
agement fees, we only makeLEGAL NOTICE
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