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New York law chief launches tax probe into private equity firms' fees practice

BAIN Capital and Apollo Global Management are among private equity firms subpoenaed by New York's attorney general in a probe to see if they are depriving the state of tax revenue.

AG Eric Schneiderman is investigating a practice that reduces tax liability of the buyout firms by converting management fees paid by their investors into fund investments, which are taxed at a lower rate.

A dozen firms were subpoenaed in July, including KKR, TPG Capital and Silver Lake.

Private equity firms raise money and combine it with loans to acquire companies. Their goal is to improve performance and sell the companies for a profit.

The firms collect management fees from investors, usually about 2pc of assets, and take a cut of investment profits, known as carried interest, that averages about 20pc.

At issue in the New York investigation is that some firms convert the fees, which are taxed as ordinary income at rates as high as 35pc, into a stake in a fund whose carried interest is taxed as capital gains at 15pc, according to a source.

Irish Independent