Tags: Kelly | private | equity | tax

Author Jason Kelly to Moneynews: Private Equity Owners Could See Tax Hikes

By Forrest Jones and David Nelson   |   Friday, 12 Oct 2012 09:59 AM

Private equity owners, who pay 15 percent in taxes on their investment income, might want to brace for possible tax hikes, said Jason Kelly, author and Bloomberg reporter.

Tax rates on capital gains, dividends and other investment income are much lower than the rates for ordinary income are, and the issue is taking center stage because of GOP presidential nominee Mitt Romney’s past experience as head of Bain Capital, where he amassed a fortune.

“That has really become a big issue and that’s where Mitt Romney has made a lot of his money, even over the past decade, as an investor in Bain funds," Kelly told Newsmax TV in an exclusive interview.

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"He made it that way when he was at Bain and working as the CEO. The question is should this be considered capital gains or should it be considered ordinary income,” Kelly said.

“There have been a lot of efforts in Washington over the past five years — it’s really been a five-year fight — on the part of some people in Washington to get this changed. It’s hard to see how it doesn’t get changed,” said Kelly, author of the book “The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything.”

Editor’s note: To order ‘The New Tycoons’ at a great price — Click Here Now.

Romney’s candidacy has shed light on the world of private equity, in which managers who buy and sell companies for profits often take very active roles in the assets they acquire.

Take Dollar General, for example. The retailer was bought out by private equity giant Kohlberg Kravis Roberts & Co. in 2007, which later took it public in 2009.

“This is a discount retailer and the sorts of things that they were talking about, when KKR bought this company several years back and hired a new CEO, were things down to ‘what flavors of Gatorade are we carrying? How much shelf space are we devoting to candles? Are we selling more men’s clothing or women’s clothing?’” Kelly said.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

“And those are the sorts of things that private equity is increasingly having to do to really get into the guts of a company and make it more valuable down the line.”

Meanwhile, private equity companies aren’t immune to taking risks.

Take dividend recapitalizations, a financing tool under which a private equity company has a subsidiary borrow money to fund a payout elsewhere.

“What it is, effectively, is a second mortgage. It’s a private equity fund looking at a company that they own, where there is already some debt, and saying ‘we think the company can take on additional debt or a different type of debt in order to fund a payout.’ That payout goes in part to their own investors, but also in part to them, the same 80-20 split usually that an exit would give a private equity fund,” Kelly said.

“There is only so much money that you can spend, and if you are spending it to pay down interest, to pay off your debt ultimately, you are not hiring people, you are not expanding, you are servicing your debt, and that could ultimately slow growth.”

Editor’s note: To order ‘The New Tycoons’ at a great price — Click Here Now.

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