Tax Receivable Agreement Private Equity

A TRA is the monetization of tax benefits. As Mr. Flaherman points out, PUTAs, which are closed between private equity fund sellers and IPO investors, have undesirable features such as cash-out options, which mean that former owners can get more cash than taxes are worth. The opaque tax strategy is the latest technology used by private equity firms to withdraw money from their companies, in this case well after the IPO. Private equity firms are now applying the strategy to their own investments. Earnings tax is estimated to be just one of 50 D.P.O. agreements backed by private equity, but industry experts say they are on the rise. The passage of tax reform last December gave investors greater security when it comes to corporate tax rates in the near future. One consequence is the increased interest of some investors in acquiring payment rights under existing tax receivable agreements (TRAs).

In short, ACCORDS are agreements made by a company (a ”pubco”) as part of an IPO to monetize Pubco`s tax attributes after the IPO for the benefit of owners prior to the IPO and investors who acquire payment rights under TRAs to such pre-IPO owners. Our previous article on ARTs focused on some ways in which tax reform could affect the value of TRA payment rights. Since the introduction of tax reform, we have seen a marked increase in investor interest in the acquisition of TRA payment rights, including through hedge funds, family offices and private trust funds. This article describes some of the functions of an AED that an investor should analyze before acquiring rights under an AER. In a typical buyout, owners make money by creating the business and selling the business to another company or public investor. Private equity firms have also found ways to be profitable before the exit with one-off special dividends and annual management fees. This characterization is also beneficial. Despite the general perception, once you exclude the general partner and its affiliates, wealthy individuals in the United States bear relatively little of the total dollar invested in private equity.