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The world’s largest private equity firms have avoided income tax on more than $1 trillion in incentive fees since 2000 by structuring payments in ways that make them less profitable, according to new research from Oxford University. they are subject to much lower taxes.
Ludovic Phalippou, a professor at Oxford’s Said Business School, has established fund groups dedicated to private investment strategies such as buyout companies, venture capitalInfrastructure and bad debt have earned more than $1 trillion in gross profits since the turn of the century.
Phalippou’s calculation comes as such performance fees have for years drawn political scrutiny in the US and Europe, and faced a new wave of calls to close the practice. Famous politicians describe it as “a-hole.”
The amount of savings is up to hundreds of billions of dollars today tax. The fee is calculated at a long-term capital gains rate that is significantly lower than the income tax rate. For publicly traded companies, up to half of the fees are paid to shareholders as dividends.
The British Labor Party is committed close the hole in an effort led by shadow chancellor Rachel Reeves, who has previously called the tax treatment “absurd” and in 2021 said she hopes to increase taxes on the private equity sector by 440 million pounds per year.
Earlier this year, Reeves announced he would push through a plan to charge a top income tax rate of 45 cents on profits private equity companies profit from successful deals amid growing pushback from industry lobbyists. Currently, “accrued interest” payments are taxed at 28% capital gains tax.
In the US, recent presidents including Barack Obama, Joe Biden and even Donald Trump all announced they would end special tax incentives but ultimately backed away under industry pressure. In the UK, critics of the Labor Party’s plan say raising tax rates will drive successful investment groups out of London and that the need to attract foreign capital is paramount.
Phalippou said in an interview with the Financial Times that his research aimed to show the huge wealth generated by high-fee private funds for an influential group of billionaires mainly living in the US . It also aims to reveal to governments the potential tax revenue they could generate from such fees which are considered income and not capital gains.
“All governments are talking about taxing realized gains. So my role is to give the best estimate of the number,” said Phalippou, who has Titled report “Private Equity Managers’ Trillion-Dollar Bonuses.”
“It shows you the upper limit of what you could collect if all the countries in the world coordinated taxing that pot,” he said. “Once you understand how much money we are talking about, you can understand why private equity is the largest source of funding for politicians and universities,” he added.
Phalippou calculates that Blackstone Group, the world’s largest private equity investor, made $33.6 billion in realized profits, the most of any investment firm. The windfall turned its top executives Stephen Schwarzman and Jonathan Gray into billionaires, and the duo were respectively among the most influential political donors to the founders. Republican and Democratic Party legislation.
A Blackstone representative declined to comment.
Schwarzman recently announced his support for Trump’s election and will raise funds with his colleagues for the former president’s re-election campaign.
Phalippou said his work also aims to provide new information on whether private investment strategies are worth the cost. His report shows that the average private equity fund earns about 1.6 times its investor’s money over four or five years, a figure he says is comparable to the approximate long-term returns of US stocks.
“It’s hard for me to look at these numbers and be surprised,” he said. “To me, it looks extraordinary, right? The figure of $1 trillion seems quite extraordinary. The number of returns is not many,” Phalippou said. “It’s good but it’s not something to write home about.”
“This study reports that private equity investors have generated returns,” said Drew Maloney, president and CEO of the American Investment Council, which represents the private equity industry. $5 trillion for retirees. This demonstrates the bond between investors and managers.”
