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PitchBook Analyst Note: From IRS to IRRs

2Q 2018

PitchBook Analyst Note: From IRS to IRRs

June 28, 2018

PitchBook Analyst Note: From IRS to IRRs
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PitchBook's latest analyst note provides an in-depth review of how recent US tax reform will impact private equity, spanning the impact on portfolio companies to timing of liquidity.

Key highlights:

  • The reduction in the US corporate tax rate from 35% to 21% will lead to an increase in free cash flow (FCF)—and therefore enterprise value (EV)—for most PE portfolio companies as tax payments, on average, decrease. As a result, we expect this to put upward pressure on EV/EBITDA multiples.
  • Large conglomerates will be more willing to do carveouts and divestitures because their tax payments will have dropped by 40%, which will lead to more opportunities for PE firms.
  • We expect fewer exits to occur in less than three years due to the changes in carried interest taxation requiring a three-year hold period to realize long-term capital gains rates on the carry. These quick exits represented only 16.9% of exits in 2017, and we expect that number to further decrease.