Side Letter: Carried interest ‘baloney’; Triton’s GP-led bellwether; Sentinel’s $5bn targets

GPs may find some LPs unsympathetic in the event that the US Senate passes a bill to end the so-called 'carried interest loophole'. Plus: Triton is testing the secondaries waters with a €1.3 billion GP-led and Sentinel is seeking $5 billion across two new funds. Here's today's brief, for our valued subscribers only.

Just happened

Tax reform: will it eat into GP profits? (Source: Getty)

Carried interest ‘baloney’
While it’s probably safe to assume that most GP executives aren’t thrilled at the prospect of their carry being taxed at a higher rate, LPs seem less perturbed. The private equity head at one sovereign wealth fund, for example, tells Side Letter in no uncertain terms that carried interest should be taxed as normal income, rather than capital gains. “There’s no justification for [carry to be taxed at a lower rate] other than people who are recipients wanting to keep more of it,” the head says.

Many GPs will argue that raising tax on carry will not only hurt the industry’s appeal for new talent but, as nearly 70 percent of managers and lawyers surveyed by Private Equity International warned last year, also hurt alignment with LPs. In other words, higher tax could eat into GPs’ incentives to generate returns. Not everyone, however, is convinced by these claims. “It’s a load of baloney*,” the SWF executive said. “GPs will do it [private equity investing] because it’s still a lot of money. All we’re talking about is taxing the profit – whether that’s 27 percent or 40 percent, there’s still a profit motive.”

Carried interest reform has been mooted multiple times over the years to no avail and this latest iteration may be no different, with Senate Democrats yet to win the support of Arizona Democrat Kyrsten Sinema necessary to pass the bill. Industry bodies, in the meantime, have been unsurprisingly vocal in their opposition to the move (America’s Investment Council, for example, slammed the proposed new rate as “punitive” and significantly “negative”). Still, those GPs hoping to count on the political support or sympathy of their own investors might find themselves disappointed.

*Editor’s note: the original word has been censored.

Triton’s test
The secondaries market may not be racing along as it was last year, yet bumper GP-led deals are still coming to market. Triton Partners, the European mid-market buyout shop, is transferring four assets from its 2013-vintage Fund IV into a continuation fund, our colleagues at Secondaries Investor reported last week (registration required). The deal could be worth around €1.3 billion, including unfunded commitments to further develop portfolio companies Assemblin, Unica, Flokk and EQOS Energie.

Secondaries buyers have been crying out for more diversified GP-led opportunities and Evercore, understood to be the adviser on this deal, has answered. Only a handful of buyers are large enough to anchor $1 billion-plus deals and many of those gorged on single-asset opportunities in 2021, bringing them close to their single-company concentration limits, according to sources. At the same time, the deal enters a market ostensibly on pause as buyers looking for a discount face sellers whose valuation expectations have yet to come down. Triton’s efforts might prove something of a bellwether for whether activity is beginning to thaw.


Fundraising FYI
Here are a couple of quick fundraising updates, courtesy of publicly available LP documents. US mid-market firm Sentinel Capital Partners is seeking $3.75 billion and $1.25 billion, respectively, for Sentinel Capital Partners VII and Sentinel Junior Capital II, according to a document prepared for Pennsylvania State Employees Retirement System in June that noted both funds should hold their final closes by mid-July. The firm closed flagship Sentinel Capital Partners VI on $2.15 billion and Sentinel Junior Capital I – which provides mezzanine financing for Sentinel’s portfolio companies – on $460 million in 2018.

Elsewhere, San Francisco-based VC Greenoaks Capital Partners is targeting $2.25 billion for Fund V and has set a $2.7 billion hard-cap, according to a document prepared for Pennsylvania Public School Employees’ Retirement System. Greenoaks was expected to hold a first close last month, with the final close targeted for the fourth quarter.

Asante to Affinity
On the subject of fundraising, Zheng Wei Sim, a former director at placement agent Asante in Hong Kong, has joined Affinity Equity Partners as a vice-president, according to a post on LinkedIn. Sim had joined Asante from UBS in 2019 and was responsible for originating and leading Asia-Pacific fundraisings, per an archived profile on Asante’s website. Affinity’s most recent flagship, Fund V, closed on $6 billion in 2017, according to PEI data.

Sim follows many Asia-based placement agents that have moved in-house to GPs during the pandemic, with former Eaton boss Chris Lerner joining Chinese venture capital firm MSA; Dennis Kwan, a former managing director in MVision’s Hong Kong office, launching a USD platform at Harvest Investment Management; and James Lee, a Hong Kong-based principal at PJT Partners, joining Cerberus Capital Management as its head of Korea.

Today’s letter was prepared by Alex Lynn with Rod JamesCarmela Mendoza and Madeleine Farman