Proposals to eliminate the deductibility of interest as part of US tax reform would be a “slight negative” for private equity, according to Blackstone chief executive Steve Schwarzman.
The proposal that ordinary income tax be applied to investments of fewer than three years, a longer timeline than the one-year threshold currently applied, “is also not a positive for his firm,” he told CNBC’s Halftime Report.
More broadly, he said that while the full reform proposal is “no love letter to private equity” for the Trump administration it has potential to be “sort of a game-changer” because of the “enormous frustration in terms of getting legislation passed.”
The comments suggest a shift in sentiment for the head of the world’s largest private equity firm, who had previously said changes to the interest deductibility rules could force the firm to adjust its funds’ investment strategies and potentially lead to lower returns for investors.
Tax advisors have told sister publication pfm that in order to avoid the impact of the new rules, some firms may choose to recapitalize before they enter into force as the proposals allow for existing debt interest payments to be grandfathered.
Speaking on a tax panel at PEI’s Fund Finance and Compliance Forum in San Francisco in October, one chief financial officer said her firm had brought forward plans to take on new debt for this reason.
It is still unclear how the final version of the interest deduction proposal will look, but the measure was toughened up in the Senate’s bill which passed last Friday. While the House version suggested interest deductibility be limited to 30 percent of earnings before EBITDA, the Senate’s bill introduced a limit of the same proportion before interest and taxes.