Fs often insist on a tax-deferred rollover — meaning they pay no tax on their retained equity until it is sold in the future. At the same time, PEFs generally favor transaction structures that permit them to increase (or step up) the basis in T’s assets by the amount of the deal price.
This is because portfolio company cash flows and PEF returns can be enhanced by the ability to amortize and deduct purchase price against T’s future profits. Unfortunately, deal structures that permit Fs to reinvest equity on a tax-deferred basis can limit the PEF’s ability to step up the tax basis of T’s assets.
To read more, please download the latest edition of McGuireWoods’ Private Equity Newsletter (PDF).
