Broken trust

The looming demise of Canadian income trusts spells opportunity for private equity firms.

On October 31, Canada's finance minister made an announcement that roiled the country's public markets and launched a thousand phone calls between many publicly traded companies and their advisors. James Flaherty indicated that a new tax would be imposed on Canada's unique income trusts, effectively destroying the primary advantage that these vehicles hold for the companies that adopt them.

For two decades, Canadian income trusts have paid out dividends that are not taxed at the corporate level, thus giving the trusts a significant premium on the public markets. The trust entities are structured using affiliated thinly capitalized companies, which are illegal in the US and other markets.

The market for Canadian income trusts has grown near a market capitalization of nearly $200 billion from just $18 billion in 2000. Now, Canada's conservative government, of all governments, has decided to crack down on what it views as a source of tax leakage. The new tax, which has yet to be approved by lawmakers, and which will not be enacted for four years, is expected to take a 30 percent bite out of distributable income generated by the trusts. A shareholder that once had to pay $44 for every $100 in distributed income will have to pay $54, under the new rules. The difference is even starker for tax-exempt investors, like public pensions, which currently receive the entire $100 distribution tax free.

While the looming demise of income trusts means the end of an attractive exit route for private equity firms, many buyout GPs are beginning to salivate at an expected wave of going-private opportunities in Canada.

Peter Gottsegen, a managing director in the New York office of Canadian private equity firm CAI Private Equity, says that immediately following Flaherty's announcement, CAI's phone started ringing. Gottsegen says his firm is already in discussions with investment bankers and income trust executives about potential deals.

He notes that many comparatively small companies have become income trusts, but now that the tax advantages will go away, they will be forced to leave the public market. Similarly, a handful of large Canadian companies that were about to convert to income trust status will be looking for alternative options.

?We've been putting lists together,? says Gottsegen.

?Special interest? shareholders given boost
The New York Stock Exchange announced last month that it has proposed to eliminate broker discretionary voting on the election of directors. The NYSE has acknowledged that such a change is likely to ?increase the influence of special interest groups or others with a particular agenda to challenge an incumbent board, at the expense of smaller shareholders.? However, the NYSE calls this potential elevation of special interest shareholders a ?cost to be paid for better corporate governance and transparency in the election process.? The amendment to NYSE Rule 452 would prevent brokers from voting on uncontested director elections if the beneficial owner has not given voting instructions at least 10 days before a shareholder meeting, according to a client memo from law firm Debevoise & Plimpton.

Abingworth appoints Heard to GC
John Heard joins the UK life sciences investment group from Intel Capital, the venture capital arm of the Intel Corporation, where he served the last six years as European Legal Counsel. During his tenure at Intel, Heard completed more than sixty venture capital financings and exits for technology startups on both sides of the Atlantic. Prior to that, he served as an Associate with Hughes, Hubbard & Reed, based first in Washington DC and then in Paris. At Abingworth, he will be responsible for deal coordination and legal assistance, and based in the company's headquarters in London.

Carlyle drops Euronext effort
The Carlyle Group will no longer pursue a Euronext offering similar to offerings already taken public by KKR and Apollo Management, according to sources. The Washington DC-based private equity giant had been pursuing a listing that would have raised capital to be committed to its global private equity activities, the source said. However, discussions with LPs and a review of the post-IPO performance of the offerings from KKR and Apollo have convinced Carlyle's partners that now is not the right time to proceed with a similar Euronext listing. The move follows news last month that pan-European private equity firm Doughty Hanson had abandoned plans to list a €1 billion private equity vehicle on the Euronext. At press time, Apollo Management's Euronext-traded AP Alternative Assets was trading down 10 percent from its IPO price. KKR Private Equity Investors, KKR's pioneering, $5 billion Euronext vehicle, was roughly 11 percent below its offering price.

Myners ?evangelical? on hedge funds
Former Gartmore chief Paul Myners is calling for UK pension funds to ramp up allocations to hedge funds, and is urging pension advisors to press for greater commitments to the industry. Currently the chairman of Ermitage, Myners chastised consultants at the Hedge 2006 Conference in London for not having a better grasp of alternative investments. Trustees and consultants alike drew his ire, for a slow pace of adaptation, as evident by the fact that only 3 percent of UK pension funds invest in the asset class. ?They [trustees] do not challenge the advice of their consultants because they are not confident enough and do not have the economic incentive to do so.? He argued that the average pension scheme should aim for 20 to 30 percent in ?different instruments under the broad taxonomy hedge fund investment.? Despite the money already pouring into the asset class, Myners believes that the hedge fund field is wide enough to sustain attractive returns. He does clarify that certain mature schemes, for companies of dubious solvency, should continue to avoid hedge funds. Myners is noted for having previously urged the UK pension community to be more aggressive in allocating to private equity and venture capital.