Paul L. Caron

Friday, March 15, 2013

NY Times: The Supercharged IPO

NY Times DealBookNew York Times DealBook:  Squeezing Out Cash Long After the IPO, by Lynnley Browning:

When the Berry Plastics Group, a container and packaging company, went public last October, it generated up to $350 million in tax savings. But the company won’t collect the bulk of the benefits. Rather, Berry Plastics will hand over 85% of the savings, in cash, to its former private equity owners.

The obscure tax strategy is the latest technique that private equity firms are using to extract money from their companies, in this case long after the initial public offering.

In a typical buyout, the owners make money by sprucing up the operations and selling the business to another company or public investors. Private equity firms have also found ways to profit before the so-called exit with special one-time dividends and annual management fees.

Now, buyout specialists are increasingly collecting continuing payouts from their former portfolio companies. The strategy, known as an income tax receivable agreement, has been quietly employed in dozens of recent offerings backed by private equity, including those involving PBF Energy, Vantiv and Dynavox.

While relatively rare, the strategy, referred to as a supercharged IPO, has proved to be controversial. To some tax experts, the technique amounts to financial engineering, depriving the companies of cash. ... “They involve millions, often billions, of dollars in cash transfers from newly public companies to a small group of pre-I.P.O. owners,” Victor Fleischer, a tax professor at the University of Colorado, and Nancy Staudt, a public policy professor at the University of Southern California, wrote in a 2013 study [The Supercharged IPO]. (Mr. Fleischer is a contributor to DealBook.) The study said the primary reason for the deals was tax arbitrage.

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