Brian Rebhun is a Managing Partner of PwC US Financial Services Tax practice. Based in the New York metro area, he also serves as a partner in the Asset and Wealth Management Tax practice and is widely recognized for his expertise in the taxation of alternative asset managers—including private equity, credit, real estate, and hedge fund advisors. With a sharp focus on the complexities of alternative investments, Brian advises clients on complex structuring and transactional matters, helping develop tax-efficient strategies that maximize value and minimize risk. His knowledge spans to partnerships, corporations and individuals, with a particular focus on New York state and New York City audits. Since joining PwC’s US Tax practice in 1999, Brian brings decades of leadership, insight and an unwavering commitment to helping his clients navigate an ever-evolving financial landscape.

Sellers should begin planning early for a potential GP stake sale. For those focused on succession planning or seeking to incentivize high performers, a transaction can help facilitate ownership transfers to new partners in the management company.

Sellers can also structure their investments to separate effectively connected income (ECI) assets—such as loan origination, flow-through investments in private equity, or US real estate/infrastructure—from non-ECI assets, placing them in separate fund and general partner structures. This strategy can make deals more advantageous to buyers with non-US investors.

Buyers should engage early on tax structuring and diligence, given the flow-through nature of asset managers. This helps ensure the investment does not trigger adverse tax consequences for their investors.

One of the biggest items to be aware of is Effectively Connected Income (ECI), which could subject foreign investors to US tax filings and liabilities. ECI is not limited to net fee-related earnings (NFRE). Buyers must model out the split of ECI vs. Non-ECI carry and assess post-tax internal rate of return (IRR). Many middle market private equity firms, direct lenders and real asset managers may generate significant ECI in their carry.

Depending on the nature of the transaction (primary vs. secondary), sellers may benefit from a step-up in basis and from interest deductibility—both of which reduce taxable income and the effective tax rate.

In order to understand these potential benefits, sellers need to pay particular attention to the purchase price allocation between the management company and carry vehicle. Step-up benefits are more favorable for management companies, which can recognize ordinary goodwill amortization deductions over 15 years. This amortization deduction may lead to an overall reduction in the effective tax rate on US-based GP stakes investors (individuals and corporations).

US-based buyers investing in non-US managers should also consider tax structuring. Many non-US management companies and carry structures were not designed with US investors in mind. Sellers may need to restructure into transparent entities and provide Schedule K-1s to buyers from their management company and carry vehicles.

Buyers should understand whether they are buying into transparent or opaque structures and whether the entities would be classified as Passive Foreign Investment Companies (PFIC) for US tax purposes. PFIC classification can result in detailed and complex reporting via their Schedule K-1. This information also needs to be provided by the underlying GP in a timeframe similar to Schedule K-1 reporting.

Buyers need to negotiate strong information rights, including timelines for receiving tax information (such as Schedule K-1 and estimates).

As GP stakes funds aggregate many underlying investments, timely information is essential for buyers to meet obligations to their limited and general partners. Buyers may also need to make estimated federal and state corporate income and state withholding payments on behalf of its partners. Buyers should request estimated tax information by late winter and final Schedule K-1s by midsummer to align with their tax processing timelines.

Sellers need to prepare their internal infrastructure to meet these new reporting requirements. The new reporting deadlines may require faster finalization of their books and records and leveraging technology to enhance reporting from their portfolio companies and investments.

Beyond common equity interests in asset managers, GP stakes buyers are also helping asset managers with liquidity solutions. Preferred equity is appealing to sellers who want to fund larger GP capital or co-invest commitments or seed new products without giving up common ownership. Preferred equity shares many tax characteristics with common ownership and can be structured as primary, secondary or a combination of both. Buyers often “purchase” portions of management fees, co-invest and carry income—and receive most or all of the income and cash flow until achieving a target internal rate of return (IRR) or multiple on invested capital. Because ownership is not permanent and the IRR is lower than common equity ownership, tax structuring and leakage mitigation for non-US and tax-exempt investors become even more important.

We always enjoy learning what members of the GP Stakes community are passionate about outside of work. Brian loves spending time with his wife, Michelle, and 3 kids—Henri (7) Pacey (5) and Shailo (3). They love going to Disney World and taking Disney cruises.

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