No one knows with absolute certainty what's in store for 2016, but that doesn't mean some reasonable predictions can't be made. Here's five of our own:
SEC wrist-slaps real estate GPs: After completing a 'sweep', or coordinated inspection review, the US Securities and Exchange Commission (SEC) needs about two years to evaluate its findings before bringing enforcement action. With private equity firms, a sweep was finished in 2012 that led to more than a dozen enforcement cases in 2015 and more expected next year. A similar sweep of real estate advisors began a year or so after the private equity exams started, so if the timeline stays true, 2016 will be when real estate enforcement cases begin coming through. Already senior SEC officials have sounded the alarm on real estate GPs charging fees for certain ancillary services like property management without proper disclosure.
LPs request more portfolio company data: Yes, it seems each year investors demand more portfolio company data, making our prediction here a safe one. But we've been learning that LPs don't just want, say, EBITDA, but unadjusted EBITDA and net income to gain an unfiltered snapshot of a company's performance and underlying cashflows. Expect this demand to heighten in 2016.
Hong Kong steals fund business from Singapore: Given its proximity, cultural ties and political connections to mainland China, Hong Kong would appear to be the perfect stepping stone into mainland China. However, Singapore and other rival jurisdictions have managed to win GPs' business by offering greater tax certainty and more flexible fund vehicles. Over the course of 2015, Hong Kong has repositioned itself as a more competitive domicile by exempting offshore private equity funds from profits tax, and appears poised to enact legislation allowing funds to be based and registered locally. Expect these reforms to happen, and for Hong Kong to capture more fund business in 2016.
The carry tax debate intensifies: We wouldn't go so far as to say 2016 will be the year that carried interest becomes taxed at ordinary income rates in the US and loses its more favorable capital gains designation, but it's safe to say the noise around carry tax will only grow louder during the election cycle (just as it did in the prior presidential election). Already, contenders on both sides of the political aisle have taken swings at private equity-related taxes.
FATCA comes under question: In preparation for 2017 reporting, managers across the globe will be further familiarizing themselves with the OECD's global tax information sharing initiative, otherwise known as the “Common Reporting Standard.” Approximately 90 jurisdictions have signed on to the initiative, with one notable exception: the US, which prefers GPs and other financial institutions to follow its FATCA regime. The costs and redundancy of the two reporting regimes working in parallel will lead more GPs and others to demand the US fall in line with international efforts.
Got your own predictions for 2016? We'd love to hear them. Email pfm editor Nicholas Donato at nicholas.d@peimedia with your best guesses.