Stories of the year: Q2

President Trump’s tax changes were starting to have an impact in the second quarter.

Just what are the effects of a Trump administration on private equity? President Trump’s tax reforms in December 2017 are regarded as one of his most radical moves, and it was in the second quarter that their impact really began to be felt.

The most notable change came from KKR, with its announcement that it planned to switch its structure from a partnership to a C-corporation, in the hope of attracting more investors.

Investors weren’t the only thing on KKR’s mind when making the switch. The new C-corporation also benefits from the Trump tax reform, which lowered the corporate tax rate to 21 percent, down from 35 percent.

This move followed Ares Management, which made a similar change in February. Other firms such as The Carlyle Group were also reported to be considering making the conversion.

LPA changes

Private equity firms were reported to be seeking advice from their accounting and legal consultants on how they should react to the reforms.

When asked about the most important provisions in the law for private fund managers, David Helprin, a principal at EisnerAmper, told pfm: “The carried interest rule and the business interest expense limitation provision are probably two of the more significant provisions for the private funds world.”

Helprin explained how hedge fund managers wouldn’t be as affected by the three-year rule as those in the private credit industry. He said some private equity and venture capital firms were looking at revising their limited partnership agreements as a result.

ILPA’s letter to the SEC

This quarter’s fourth most read story was the Institutional Limited Partners Association calling on the Securities and Exchange Commission to update its rules around marketing and fee disclosure and enhance other reporting and disclosure requirements to protect investors.

In their letter to SEC in April, ILPA argued that the advertising rule, which was last amended in 1961, needs to be changed to become more transparent on the true cost of a private equity investment.

ILPA also made it clear that they were against any changes to Form PF that collects various data points on private equity firms – such as borrowings and liabilities – that could be useful reference points for prospective LPs.

The priorities of CFOs

The role of chief financial officers also figured on pfm’s news agenda in the second quarter following a survey that asked CFOs what they prioritize about their jobs.

According to the 2018 Global Private Equity Survey conducted by EY, CFOs focus on three areas: talent management, technology transformation and outsourcing,

The survey questioned 110 CFOs, with 9 percent of them coming from firms with less than $1 billion of assets under management and about 26 percent had AUM of $15 billion and greater.

Overall asset growth was the main concern for CFOs (58 percent).

Outsourcing waterfall calculations

Transparency among general partners and limited partners remained a significant focus. Outsourcing waterfall calculations is one way for GPs to be more transparent with LPs, according to one of the most-read articles in pfm.

Under a waterfall verification/waterfall recalculation service model, a third-party service provider (including, but not limited to, a private equity fund administrator) would be engaged to independently verify a fund’s waterfall calculations – ensuring that methodologies and results align with the fund’s governing documents.This method could be beneficial for GPs and LPs for different reasons. LPs would have the benefit of an independent review with regards to the incentive fees they are being charged on positive performance, and GPs would have the benefit of outsourcing a complicated accounting function to a third party, thus decreasing administrative burdens on both sides.