Brief : Three House Democrats are pushing legislation that would repeal the carried-interest tax break used by fund managers to reduce the levies they owe to the Internal Revenue Service. The bill would close the carried-interest tax break and require many hedge fund and private-equity managers to pay higher ordinary income-tax rates, rather than the lower rates on capital gains. Representatives Bill Pascrell of New Jersey, Andy Levin of Michigan and Katie Porter of California are sponsoring the legislation, which could become part of broader talks on taxes in Congress in the coming months. “The ability of private-equity and hedge fund financiers to use the loophole impacts income inequality, as this tiny subset of executives make up some of the wealthiest citizens in the world,” the lawmakers said in a statement on Tuesday. The legislation would mean that investment fund managers could pay significantly higher tax rates, because they wouldn’t be able to classify some of their income, called carried interest, as capital-gains earnings. Ordinary tax rates max out at 37% and long-term capital gains rates are 20%, plus an additional 3.8% surcharge to fund the Affordable Care Act. Carried interest is the portion of an investment fund’s returns that are paid to hedge fund and private equity managers, venture capitalists and certain real-estate investors eligible for lower tax rates. Money managers who put their own money at risk, such as private-equity partners who invest money in their funds, could still qualify for the break under the House bill. However, all the income earned from managing a firm’s assets would be taxed at ordinary rates, according to the lawmakers.
Brief: Cash levels in investment portfolios have hit the lowest since just before the so-called taper tantrum of 2013, according to Bank of America’s February fund manager survey, which also showed investors to be overwhelmingly bullish on the economic outlook. World stocks have been notching successive record highs in 2021, with central banks remaining supportive and governments injecting money into the system to get economies up to speed after the damage caused by COVID-19. “The only reason to be bearish is ... there is no reason to be bearish,” Michael Hartnett, BofA’s chief investment strategist, told clients, who have the highest equity and commodity allocations in a decade. A net 91% of them expect a stronger economy, the best ever reading in BofA’s survey published on Tuesday, which covered 225 fund managers with $645 billion in assets under management. Investors showed they had the capacity to increase risk, taking their cash levels down to 3.8%, the lowest since March 2013, just before the U.S. Federal Reserve sparked a market tantrum by signalling its intent to wind down, or taper, the bond-buying programme it launched during the 2008 crisis. However, investors hear echoes of the 2013 situation, and see another taper tantrum as the second biggest “tail risk” after delays in the rollout of coronavirus vaccines.
Brief: Emerging markets funds must use the next five years to ensure ESG is at the centre of investment philosophies, with the biggest environmental and social challenges located in the countries they invest in, RWC Partners’ John Malloy has said. Coming off the back of a strong end to 2020, which was boosted by factors including the US’ announcement of a further USD1.9 trillion of Covid-19 related stimulus, the challenge for emerging markets investors now is to focus on five years of real change across economies. Malloy, co-head of Emerging and Frontier Markets at RWC Partners, says a focus on ESG across emerging markets is paramount: there is significant scope in these markets to effect long-lasting change. “On a global scale, emerging and frontier markets account for the largest share of the world’s population, land and mineral resources. They are the drivers of global growth and consumption. Sustainability is a function of their development, and it is therefore essential to promote responsible business practices, enforce human rights and environmental protection,” Malloy says. “These are also high impact markets where a minor change can have major global consequences. Stopping deforestation in Brazil, reducing emissions in China, eliminating poverty in India, or finding a solution to water scarcity in Africa, for example, could change the entire planet. ESG considerations are vital when investing in developing countries, and if the next five years are to be the years of emerging and frontier markets, they will also be the years of ESG.”
Brief: Switzerland’s wealth tax offers a rare real-world example of how a levy on assets can work, just as such ideas gain traction elsewhere in the wake of the coronavirus crisis. The measure forces residents in one of the world’s richest nations to tally the value of their investments, real estate, cars, fine art, Bitcoin, and even beehives and cows. A percentage is then skimmed off by cantonal governments. Switzerland, among only a handful of countries with the levy, can make a claim that it has the most effective one. With the Covid-19 fallout causing government debt to swell, and hurting poorer people most, wealth taxes are being debated from California to the U.K. as a tool both to pay down debt and address inequality. U.S. Senator Elizabeth Warren, Nobel laureate Joseph Stiglitz and economist Thomas Piketty are among proponents. Criticisms range from the view that it’s wrong to target assets accumulated through income that is already taxed, to more practical questions of how to fairly operate such a levy. The Swiss don’t seem to be very bothered by all of that. “It works for us,” said Stefan Kaufmann, a farmer from Wetzikon in the canton of Zurich, who describes the policy as a good Swiss compromise.
Brief: We all know that the residency status and the domicile of an individual can have a dramatic impact on their tax position, so it is important to understand what impacts both. As a result of the covid-19 pandemic many people have been caught the wrong side of borders and for some this could be expensive. Neil Jones explains the added complexities affecting residency status, and outlines how to stay on the right track. In the normal course of events the ability, or inability, to travel to and from the UK would have consequences, however fortunately HMRC issued guidance. This deals with the exceptional circumstances presented by covid designed to help advisers and individuals understand the impact on both residency and domicile. Before looking at the impact of the guidance, we need to understand how residency and domicile work. This test starts with conditions to establish if an individual is non-UK resident. If they were resident in the UK for at least one of the last three tax years and present for fewer than 16 days in the UK in the current tax year, or were not resident in the UK in the three previous tax years and present in the UK for fewer than 46 days in the current tax year, then they would be classed as non-resident. This would also be the case if they worked overseas full-time and are present in the UK for fewer than 91 days, and work fewer than 31 days in the UK.
Brief: A year of pandemic prudence is giving way to jumbo dealmaking in Europe for deep-pocketed private equity houses. Buyout firms have announced $29 billion of takeovers involving European companies this year, up 60% year-on-year and the most for this period on record, according to data compiled by Bloomberg. That’s after months in which many large buyers, including Blackstone Group Inc. and CVC Capital Partners, stayed on the sidelines or focused on funneling much-needed capital to their existing portfolio companies. Now, opportunities stemming from the coronavirus crisis, an abundance of cheap credit and willing sellers looking to clean up their balance sheets are creating ripe conditions for bigger deals. Soaring equity markets, meanwhile, are driving up prices. “It‘s hard to overstate it,” said Anthony Diamandakis, co-head of global asset managers at Citigroup Inc. “Chances are high that we will see jumbo deployment this year.” The industry has long had the luxury of holding a record amount of unspent capital, and with the time to pick its bets. Investors continued to pour money into buyout funds last year, even as private equity firms stayed penny wise.