International Tax Partner Rachel Palmer reflects on a busy year for Private Equity and how an active market brings the importance of understanding the tax implications of transactions into focus.
When I catch up with my clients one of the things I am regularly asked is what am I helping other clients with? At the moment it is hard to see many clear trends - over the last 12 months I have had clients who have successfully listed, listed groups who have bought by Private Equity (PE) house, clients which have made acquisitions, ones who have been refinancing their debt and others who have been faced with a range of different business as usual challenges. The main trend I’m seeing is that market activity is high.
Of the listings, most are in the US. There are a lot of tax angles to work through; ranging from determining the identity of the listed vehicle and forming the new structure to ensuring the tax department is ready for being part of a listed group. My experience is that groups seem to be listing much earlier in their cycle and so some of the standard IPO readiness workstreams are happening once they are listed.
While slightly less popular, IPOs via a transaction with Special Purpose Acquisition Company (SPAC) have been discussed in nearly all of my IPO projects. These present a whole raft of tax issues to manage as a result of the structure of most SPACs; they certainly are not simple from a tax perspective. I suspect SPACs will continue to be discussed in most IPO conversations given how much money they have to invest.
At the same time I’ve also seen the reverse of an IPO - that is listed clients being bought by PE houses. Here tax teams have to deal with a new group of stakeholders and a change in objectives as the focus switches to cash tax rather than the effective tax rate. It's often tax teams who take the lead on the operational side of running the new holding structure (e.g. ensuring responsibilities are clear and appropriate filings have been made).
At the same time I’ve also seen the more ‘standard’ transaction where the PE owners of some of my clients have changed. The high level of dry powder in PE houses has made the process more time consuming with multiple bidders to manage. There has also been an increased focus on tax issues which could impact the value (e.g. tax assets like losses and tax risk areas). Post deal there continues to be a focus on bedding in the new structure and dealing with post deal actions like determining the corporate and VAT treatment of transaction costs.
Refinancings have continued at pace given the amount of the overall activity in the market. The tax focus continues to be on ensuring that deductions are obtained for the external interest expense and managing the tax treatment of any foreign exchange movements.
As well as all of the M&A activity we are also seeing an increase in ‘business as usual’ activities. For December year ends we are approaching the deadlines for filing tax returns. There’s also a number of new areas to deal with - ranging from responding to new international working patterns or understanding the impact of the next raft of US tax reforms and the impact of the minimum tax proposals.
It's been great to reconnect, in person, with so many different businesses over the last few months. When I get asked what I am seeing in the market, my answer is that activity is high, despite the pandemic (or maybe as a result of it), either way, a lot is happening and understanding the tax implications remains key.