Carl Thoma: Fee structures won’t last 10 years, carry tax will change in four

The Thoma Bravo co-founder stays upbeat despite rising political risks, but has some warnings for the private equity industry.

The private equity industry’s 2-and-20 fee structure cannot survive the next 10 years, and the tax treatment of capital gains on carried interest will be gone in four, Thoma Bravo co-founder Carl Thoma said in remarks at the CFO & COO Forum in New York Wednesday.

“Our industry has been on a nice roll and I don’t see any disasters, [but] rates of return have to come down…we’re not manufacturing enough new companies to buy,” he said. Thoma Bravo is one of the industry’s leading tech investors and it ranked eighth on the PEI 300 list of the largest private equity firms by sums raised over the past five years.

Overall, “the amount of money [raised by private equity] has grown at three times the rate of the number of companies to buy,” Thoma said in a fireside chat with Private Equity International senior editor Toby Mitchenall.

Relative to other markets, private equity will “still be okay, [but] it’s hard to believe big funds can push their fees up right now. Our fees will definitely come down…in the next 10 years. We will go into a recession and we’re paying super-high prices.” He foresaw “a period like the hedge funds have seen of, like, 1.5 and 15 [percent].”

In a series of measured remarks at the event, Thoma warned that the flood of money entering private equity posed a risk “that it imposes illiquidity of some 20-30 percent of their [investors’] assets and I think some managers aren’t thinking about that…My fear is that the [secondaries market] won’t take care of that.”

Thoma remains optimistic about the industry though, praising the nature of ‘cleaner’ technology businesses and their fit with ESG developments, as well the beneficial influence of so-called millennials and their values on his firm and others’. He noted that “notwithstanding what LPs like to tell you, I do think that this industry can better execute at bigger scale.”

Yet, Thoma predicts a worsening political environment for the industry where “we still have capital gains on carried interest and my instinct tells me that in the next four years it’s going to go away.”

A factor? “Sometimes our industry has gotten so big that we’ve become a little more self-centered” at the expense of being able to win the hearts and minds of policymakers. “We have to go back to telling those stories [about portfolio companies] in local communities.”