private equity

[demann]

As a small investor primarily interested in index funds it would seem that I am disadvantaged if large public companies go private( e.g. BCE ) . I would think that for e.g. a Can index would no longer refelect the market in Canada if large companies are no longer traded. If this is the case how does one gain exposure to these private companies.

[parvus]

Become a teacher?

OTOH, some private equity firms are going public, but I'm not sure that's an investor-friendlything.

[Goofyboy]

If BCE goes private (i.e. off the market), they will be taken out of the index. So as an index investor, you will still be following/reflecting the market.

[AltaRed]

But the OP has a point. A large entity being part of the market is not longer directly accessible in the market.

Howver, you still get to play via Rogers and Telus. Probably better bets than the pain and suffering endured via BCE for a very long time anyway.

[kcowan]

I think the first flaw is the assumption that the TSX represents the Canadian economy. Very large sectors such as the services industry are unrepresented: law firms and CA firms as an example. GPs and specialists as another. Are auto dealerships properly represented? Granted these might better be on the Venture exchange but that one is even more skewed.

Now a more fundamental question would be:
Will the removal of BCE from the TSX change the expected behaviour of the TSX index? Dividends will be less. Should we expect higher growth? What if Magna gets Chrysler? Lower dividends but what about growth?

[northbeach]

My question if BCE goes private involves the loss of taxes going to the government.

If a private company buys BCE they will not be taxed since they will not show profit as they would be highly leveraged. If a pension fund such as Teachers invests in BCE no direct tax payments go to the government. Taxes are taken from the pensioners yearly income.

So that would mean that BCE going private would be no different tax wise than if it turned itself into an Income Trust where most holders paid taxes in their retirement years.

Do I understand this correctly?

If so the Canadian government should not allow private equity to buy BCE.

[martingale]

Do I understand this correctly?

Highly leveraged = lots of debt = lots of interest payments = interest income = tax on interest income. All that changes is who pays the tax bill.

[Bylo Selhi]

Do I understand this correctly?

See http://www.financialwebring.org/forum/v ... 176#193176

[marty123]

Do I understand this correctly?

See http://www.financialwebring.org/forum/v ... 176#193176

The quote points to a statement that wasn't debated. I see mitigating factors:

- LBO can cause enough expenses for a buyer to eliminate taxes, but the tax is not deferred. It is passed on to the lender. For each $1B I lend a private equity firm , I'll pay taxes on the interest. The burden of taxation shifts from the private equity firm to the people that finance the LBO

- OTPP is not printing money. In order to come up with the funds required for the purchase, they have to:
a. liquidate assets which transfers them to another investor which will pay taxes on them;
b. borrow by issuing bonds which will be taxable dollar-for-dollar by the entity that buys them; or
c. partner with firms that do not enjoy the same deferral potential

It's a matter of where the LBO financing is issued. If the financing is long-term and issued in the US or a foreign market, then there is tax leakage which can exist (depending on withholding rates and/or how the deal is structured). Otherwise, it's an overblown argument.

- Also, private equity firms typically reshape a company, and put it back on the market, where investors will receive dividends and pay taxes on them. The tax deferral may be for 3-5 years until the IPO.

[martingale]

If the financing is long-term and issued in the US or a foreign market, then there is tax leakage which can exist (depending on withholding rates and/or how the deal is structured).

I don't even think there needs to be tax leakage. If a Canadian firm in Canada pays interest to a foreign firm, the foreign firm ought to pay Canadian tax on the interest it earned inside Canada. Furthermore, we could require the Canadian borrower to withhold and remit to CRA the taxes due, so that CRA doesn't have to chase after and/or audit a foreign firm. If that's not already true, that's the change to tax law that should be made to plug the leak.

[marty123]

If the financing is long-term and issued in the US or a foreign market, then there is tax leakage which can exist (depending on withholding rates and/or how the deal is structured).

I don't even think there needs to be tax leakage. If a Canadian firm in Canada pays interest to a foreign firm, the foreign firm ought to pay Canadian tax on the interest it earned inside Canada. Furthermore, we could require the Canadian borrower to withhold and remit to CRA the taxes due, so that CRA doesn't have to chase after and/or audit a foreign firm. If that's not already true, that's the change to tax law that should be made to plug the leak.

True. I just meant to say that withholding rates are lower due to the tax treaty, so there is some element of leakage, which I still maintain is less than it would have been for a trust. I also am of the vague impression that the treaty is being changed to exclude interest income from withholding, but I can't recall where I saw that, and whether it was imminent or just a suggestion.

The point of my post is that trust proponents are using this no-tax-because-of-LOB argument for political purpose and fear-mongering, because it makes a good headline and the average voter will not be able to assemble the facts.

[AltaRed]

I also am of the vague impression that the treaty is being changed to exclude interest income from withholding, but I can't recall where I saw that, and whether it was imminent or just a suggestion.

Flaherty made some pronouncement about the time of the budget about working with the US to revise the tax treaty to exclude interest from withholding.

I do not know what Canada does now across the spectrum for Cdn ex-pats in the USA, but I do know I had 10% withholding via my Part XIII filings on all my interest income while I was a resident of the USA. Conversely however, there are many sources of US interest that do not attract US withholding by the IRS for Canadians. Most, if not all, of my interest income from USA does not attact any US withholding.

[Norbert Schlenker]

Hard to know whether to put this link here or in a trust thread, but it's worth reading Tom Bradley's piece in today's G&M.

https://secure.globeadvisor.com/servlet ... RBRADLEY20

[yielder]

As private equity deals grow, so does public anxiety

Private equity investment firms, which are buying up companies worldwide at a heady pace, haven't been charged with breaking any laws. But the bigger and richer these investment titans become, there's a natural suspicion that private equity's gains may come at the expense of others — average investors as well as workers, lenders and perhaps the economy as a whole.

The public-to-private movement has an inescapable aura of exclusivity to it, because, well, that's the point: Some of the most brilliant financiers on Wall Street take money from well-heeled investors, borrow on top of that, buy up businesses, remake them out of the public eye and eventually sell them for what all parties involved hope is far more than the purchase price.
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As of last week, Standard & Poor's counted 12 companies within the blue-chip S&P 500 stock index that had buyout offers on the table from private investment groups. The list includes utility company TXU Corp., retailer Dollar General Corp. and eye-care company Bausch & Lomb Inc.
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But here's the question that Jeffrey Bronchick, who helps oversee $3.7 billion at money manager Reed Conner & Birdwell in Los Angeles, wishes more of us would ask: What are we giving up in future returns by selling out today?.
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When private equity seals a deal, Bronchick says, "they're buying my upside" — meaning what he might have earned if the company had remained public and prospered.
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"If the bottom fell out, they'd still walk away with huge amounts of money," David Dreman, a veteran investor who heads Dreman Value Management in Jersey City, N.J., says of the private equity players. They're paid to watch out for their investors, not their creditors.

But Federal Reserve Chairman Ben S. Bernanke is paid to watch out for creditors, and last week he warned that financing for private equity deals posed "significant risks" for banks and that the central bank was taking a closer look.

Shareholders may feel that private equity investors are stealing their companies, and workers may believe they aren't fairly sharing in the wealth. But Bernanke raised the most serious risk of all: that the private equity mania could be sowing the seeds of the next major U.S. debt crisis.

[WishingWealth]

In The Economist.
The business of making money

...Private equity has become a byword for money-making skills. “Why are we here attending conferences when we should be setting up private-equity firms?” quipped Niall Ferguson, a historian, at a conference held at the London Business School on July 2nd. But the industry's wealth has also made it plenty of enemies, with trade unions and left-wing politicians calling for curbs on its activities and higher taxes on its earnings.
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A spectator's sport for all but a handful.


WW

[Taggart]

Toronto Star

Nov 22, 2008

Buyout kings bracing for the blame

[George$]

A worth reading New York Times article today
[url=http://www.nytimes.com/2008/12/07/business/07leon.html?ref=business&pagewanted=print]In Private Equity, the Limits of Apollo’s Power
By JULIE CRESWELL[/url]

The promise behind private-equity firms like Apollo is that they can fix broken companies far from the bright glare of the public eye. No longer tied to meeting investors’ quarterly earnings expectations, company management can focus instead on improving operations.

Private-equity firms raise huge sums from investors like pension funds and endowments and then borrow more from banks and other lenders so they can put ever larger sums to work.

During the period when they own a company, private-equity firms pay out some of the company’s profits to their investors — and the buyout firm itself — sometimes recouping several times their original investment in dividends before they either sell the company or take it public again.

One of the longstanding criticisms of buyout firms is that they engorge targets with debt and skim the profits for themselves. That image was reinforced during the boom with stories about buyout executives’ over-the-top birthday parties and other lavish excesses.

The notion that buyout firms were only on the hunt for quick gains was further strengthened by actions of Apollo and some of its peers. Sometimes within just a year of acquiring a company, they issued debt that was used to pay fat dividends to the funds themselves.

Besides layering more debt onto the companies, the move effectively allowed Apollo and its competitors to handily recoup some, if not all, of their initial investments.