Carried interest: a private equity tax break under threat


One big event today: Our inaugural FT Dealmakers Summit begins this morning at 8:15am London time and runs for the full day. 

Find the event agenda here, which features sessions with speakers from top banks, law firms, corporations, hedge funds, private equity groups and the DD team. It’s not too late to register — use this link. Ticketed guests will be able to watch on-demand recordings even if they can’t make a session today.

Welcome to the Due Diligence briefing from the Financial Times. Not a subscriber? Sign up here. Drop us a line and join the conversation: Due.Diligence@ft.com.

Note to private equity: there’s nothing binding about your tax breaks

There’s a tax break for financiers that has helped create more millionaires than the UK’s National Lottery. It’s been around since the 1980s — but laws can change, and some executives are worried.

The premise is simple: private equity executives can receive sums of money in addition to their pay cheque. It’s a feature that a private banker who advises them on how to spend it described as “life-changing”. That’s because they are taxed on those payments at significantly lower rates than many workers pay on their salaries. 

But UK Chancellor Rishi Sunak is now reminding PE that, far from being set in stone, this generous tax treatment is a political choice. 

A consultation closed on Monday on a review that will look at “the interactions of how [capital] gains are taxed compared to other types of income”, as requested by Sunak.

Rishi Sunak © FT montage; Reuters/Getty

Any change in the UK could potentially set the tone for reforms elsewhere, as coronavirus leaves governments in desperate need of funds and raises the pressure to push some of the burden to the richest in society — though in the US, even under a Joe Biden administration, change is by no means inevitable. 

As some dealmakers brace for the possible axing of their big perk, DD’s Kaye Wiggins and Mark Vandevelde have dug deep into its history for this fresh FT long-read on the topic.

It’s a story that weaves from the wildcat drilling of the early 20th century, to a nervous 32-year-old lawyer threatening Margaret Thatcher’s chief financial secretary with offshore structures, to Blackstone’s Steve Schwarzman accusing Barack Obama of starting “a war” against private equity that was “like when Hitler invaded Poland”. 

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Stephen Schwarzman © Bloomberg

“I think most people even in private equity know that taxes will have to rise . . . to an extent it’s fair enough,” a senior dealmaker says. “Maybe it will calm down feelings of inequality.” 

We’re not sure everyone feels the same way.

SoftBank: what’s down is up

SoftBank has had a volatile relationship with its investors. But since July, DD has been making the case that things at the Japanese tech conglomerate aren’t as bad as they seem.

He may not be Jesus Christ, as he likened himself to earlier this year, but the group’s founder Masayoshi Son is beginning to lead the company down a more promising path.

For starters, SoftBank’s position in China’s Alibaba — setting aside recent happenings at Ant Group — has been on a roll. 

Next, there’s the huge global rally in tech stocks where investors have bid up anything that resembles something that may represent growth. 

That’s been a boon to SoftBank’s Vision Fund and Vision Fund II, where mark-to-market performances have improved rapidly since the market meltdown in March. 

And now, there appear to be signs that Son is beginning to take corporate governance seriously — a big win for shareholders such as Elliott Management and Baillie Gifford, who have been pushing for change. 

Rajeev Misra © Bloomberg

Three senior executives — Vision Fund head Rajeev Misra; chief operating officer Marcelo Claure; and chief strategy officer Katsunori Sago — are being removed from SoftBank’s board to improve external oversight, the group revealed during its latest earnings call. The board changes won’t influence their day jobs, DD is told. 

Also leaving the SoftBank board is Yasir al-Rumayyan, the head of Saudi Arabia’s sovereign wealth fund, who pumped $45bn into the Vision Fund on the instruction of Crown Prince Mohammed bin Salman

The governance shake-up marks a shift in the balance of power at the investment group, infamously run in accordance to Son’s every whim.

But does this mean the action at SoftBank will start to die down? DD doubts it. 

After a period of asset sales, Son is armed with a huge cash pile and is keeping his options open. That includes continuing to place big bets on publicly traded tech stocks.

Our colleagues over at Lex recommend investors find alternatives to buying into the SoftBank story, even after the latest changes. 

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Supreme’s most lucrative collaboration yet

© REUTERS

When VF, the clothing conglomerate behind The North Face and Timberland announced on Monday it had signed a deal to buy streetwear brand Supreme, it promised to keep the label’s “cool factor” intact. 

But that will perhaps be easier said than done. Every brand worth its salt knows that hype has a short shelf life.

Supreme, the streetwear fashion line that launched in 1994 with skaters in mind, preserved its “cool” image through scarcity and clever marketing. The idea was to drop only a limited amount of streetwear, which, by the laws of supply and demand, would make its products — and by extension, the company — more valuable.

Too much hype can also be a bad thing. Supreme’s “cool factor” hinges on the people that wear its clothing and that’s something it can’t control. 

For example, the likes of Victoria Beckham and Jonah Hill have been spotted donning its red and white logo. Then there’s the fact that Supreme fell into the hands of private equity shop, The Carlyle Group, which according to Hasan Minhaj, the host of Patriot Act, is supremely uncool. DD highly recommends you watch the whole video. 

Founder James Jebbia sold a 50 per cent stake to the private equity group in 2017 for $500m, effectively valuing the brand at $1bn. And while we um and ah about whether the brand retained its “cool factor” in the process, Carlye has doubled that money with its sale to VF. 

Another deal catering to the sneakerheads that scour Supreme’s racks is in the works: private equity groups Permira and Triton have been circling Boston-based Reebok, people familiar with the matter told the FT, as corporate parent Adidas explores its options for the long-unhappy marriage between the two brands.

One person familiar with those talks speculated to DD that VF would be an ideal suitor for Reebok, but the odds of the company making another multibillion-dollar footwear acquisition this year are about the same as scoring a much-coveted Supreme MetroCard.

Job moves

  • Former TikTok chief executive Kevin Mayer has joined Access Industries, the investment firm owned by billionaire Len Blavatnik, in an advisory role scouting new opportunities for the company. More here from The Wall Street Journal.

  • Sheila Bair, who chaired the Federal Deposit Insurance Corporation during the 2008 financial crisis, will chair the board of the US government-sponsored mortgage lender Fannie Mae. 

  • PizzaExpress appointed former Wagamama chief David Campbell as its new chief executive. The restaurant chain also named former Asda boss and Wagamama chairman Allan Leighton as its new chairman, part of a recapitalisation that hands bondholders ownership of the restaurant chain in exchange for paying down £416m worth of debt. More here.

  • CVS Health has named Karen Lynch, chief of the company’s Aetna insurance unit, as its next chief executive.

  • Index Ventures has hired Adrianna Ma as its new chief operating officer, to be based in San Francisco. She was previously a managing partner at private investment group Freemont, and before that, a managing director at General Atlantic and a vice-president of M&A at Morgan Stanley.

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Smart reads

The end of an era Facebook and its fellow tech monoliths enjoyed a cosy relationship with the Obama administration but the return to a democratic White House may not restore the alliance as Joe Biden’s team gears up to combat an array of antitrust, tax, and content regulation issues stemming from Silicon Valley. (FT)

When the chips are down Intel is losing its edge to an onslaught of global competition. Unattainable technology goals and ensuing mishaps led the chipmaker, once an emblem of homegrown American ingenuity, to explore outsourcing its assembly line. The move has broader implications for the US’s position as an industry leader. (WSJ)

News round-up

Ant faces tortuous path back to market as Beijing tightens rules (FT)

Uzabase agrees to sell business news site Quartz (WSJ) 

Martin Sorrell calls for WPP successor to resign in fresh broadside (FT) 

Vaccine breakthrough fuels broad global market rally (FT) 

Deutsche Bank rebuffed ECB over call for action on leveraged finance (FT)

Elliott Management takes stake in software company F5 networks (WSJ)

Private equity firms circle Reebok (FT)

Farfetch secures $1.1bn backing from Alibaba and Richemont (FT) 

EY faces £1bn lawsuit over audit work for NMC Health (FT)

Thai regulator approves $10.6bn takeover of Tesco operations (FT)

Blackstone, CVC revive listing plan for $10 billion payment firm (BBG)



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