Private equity casts its eyes on bruised trust firms

[hiti]

Most CEOs are still grappling with the news, and it's too early to tell how many are actively contemplating a decision to take their company private, either by seeking an outright buyer or by partnering with a private equity firm in a management buyout. But if private equity players do descend en masse on small to medium-sized Canadian income trusts, it could have some unintended economic consequences: namely, some of the same problems that Ottawa was attempting to fix with its new rules.

That's because private equity funds generally use leveraged buyouts, loading up their acquisitions with debt to create deductible interest payments that minimize taxable income. The irony is that's basically the same setup that early trusts used to avoid paying corporate tax.

On top of that, leveraged buyouts, because of the heavy use of debt, “limit reinvestment in capital assets,” Canaccord Capital Inc. analyst Chris Rankin warned in a note to clients on Thursday. “A systemic increase in leverage will reduce investment in businesses, reducing Canada's productivity.”

That's another one for the irony list. When he announced the clampdown on trusts, Finance Minister Jim Flaherty cited concern that trusts hinder productivity because of the temptation to skimp on reinvestment and instead pay out more cash to investors.

And should foreign buyers predominate (which may be the case, given the massive scale of the U.S. private equity business compared with Canada's), more corporate profits will be shuffled out of the country. The result will be tax avoidance, tax leakage and weak productivity, critics say. In other words, square one.

“We are going to see a transfer of public leveraged buyouts — the trusts — to private LBOs at the private equity funds,” predicted Barbara Gray, a top-ranked income trust analyst at Blackmont Capital. “My phone has been ringing off the hook, with the U.S. hedge funds and private equity funds looking for guidance on what to buy.”

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This article in today's G&M explains investments and just how incompetent our present Federal Government is. Even the Civil Servants in the Finance Department if they pushed for this elimination of IT funds don't understand the corporate business.

Our present Finance Minister certainly hasn't a clue as to what creates jobs and keeps those taxes pouring into federal coffers and creating huge surpluses. Surpluses which are going to disappear under these amateur rules this government has imposed in IT and corporations.