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April 10, 2012
Private Equity for Tax Efficient Gains: Learning from Mitt Romney
Whether or not you support his campaign for President, everyone can agree that Mitt Romney has been a very successful investor. As widely reported, he has created enormous personal wealth, primarily from his private equity portfolio.
Less well known is the contribution to his wealth derived from the built-in tax efficiency of private equity as an asset class. The combination of strong investment performance and lower tax rates can be very powerful:
“Under increasing pressure, Republican presidential candidate Mitt Romney recently released both his 2010 tax return as well as his 2011 estimated return.
While his income numbers were staggering, placing Romney among the wealthiest income-earners in America, it was the relatively low taxes he paid and is expected to pay for 2011 that has been the subject of intense water cooler discussions.
In 2010, the presidential hopeful had reported gross income of US$21,661,344, made $2,983,974 in charitable donations and paid $3,009,766 in federal taxes, resulting in the effective 13.9% tax rate that has raised the ire of many hard-working Americans who make substantially less but pay tax at a higher effective rate.
Romney’s income for 2011 is estimated to be slightly less, at US$20,901,075. Last year he made charitable gifts totaling $4,020,572 and is estimated to pay federal tax of $3,226,623 making his 2011 effective tax rate 15.4%.
The issue of Romney’s wealth has dogged him throughout his campaign to be selected as the Republican presidential nomination, as Americans wondered whether his enormous wealth, estimated at more than US$250-million, could impede his ability to be president and relate to the average American. Much of his wealth can be attributed to being a founding partner of Bain Capital, a venture capital and private equity firm he started in 1984.” (Source: Jamie Golombek, writing in the Financial Post)
Investing in the private equity opportunities offered by Kensington can provide some attractive tax efficiencies. For starters, the income from the investments is almost entirely capital gains, which are taxed at the lowest rate of any form of income. Another point is that many of the investments in Kensington’s portfolio are Canadian private companies, and depending on the form of investment, may be eligible for the lifetime capital gains exemption of $750,000 per taxpayer. The expenses of investing in private equity are fully deductible and can be used to offset income from investments, including regular investment income as well as capital gains income. And in the private limited partnerships such as our Direct Funds, the expenses in the early stages of the investment process that are contributors to the “J-Curve” may help offset income from other sources that the investor may have.
The main value of choosing private equity for your investment portfolio should always be the investment returns and the low correlation of results with other forms of investment, but the potential tax benefits of these returns should not be overlooked.
As Mitt Romney knows, tax efficiency can be a valuable contributor to performance!