Four financial planning opportunities for private equity professionals

Wealth planning
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With the help of advisors who understand their unique personal finance structure, private equity professionals can avoid critical missteps and take advantage of their unique earning power.

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Since 2020, private equity has seen record deal making activity. This success can create unique challenges and opportunities for the personal finances of senior professionals in the industry.

For those in private equity, personal wealth can look very different to that of other high-net-worth individuals. With a significant proportion of their personal cash often tied up in their fund, which can’t be readily sold, the majority of their wealth tends to be illiquid. Their cash flow also changes over time as carried interest is realised and fund distributions occur – which for many, can be years away.

That creates a specific set of hurdles when it comes to borrowing to buy a property, paying taxes or estate planning. Those in private equity require a tailored approach from wealth managers who understand their specific financial profile.

It’s a scenario that is playing out more and more. In the United States alone, 2021 private equity deals hit $1.2 trillion in value, topping the previous high by 64 percent, according to PitchBook Data, Inc. Europe is similarly active with almost €750 billion over 7,200 deals, much of it taking place in the UK and Ireland.

“Private equity investors have been extremely active over the last few years and every quarter valuations have been hitting record highs,” says Oliver Saiman, head of the private equity professionals team at RBC Wealth Management in London. “The UK in particular has seen an incredibly high level of transaction activity in the past eighteen months,”

The irony is, while those in private equity have significant expertise in making investments and generating high returns in a professional capacity, they often don’t have the time to optimise their personal financial circumstances. This is especially true when it comes to creating tax efficiency, broader estate planning and using leverage in a personal capacity. They are often extremely time-poor and don’t have the bandwidth to understand the risks to which they are exposed, or the planning opportunities available to them and their families.

One of the biggest challenges is a less than ordinary remuneration structure. “These individuals get paid in a number of different ways,” says Nick Ritchie, director, wealth planning for RBC Wealth Management in London. Alongside a base salary, private equity professionals may receive a share of fund management fees, gains from co-investments and carried interest on successful exits – (a payment for investment services that is taken out of the profits of the money managed for investors). “A lot of this simply isn’t recognised or accounted for by high street banks and even many private banks and wealth managers, so this means establishing a financial profile for the purpose of obtaining credit and accessing other financial services can be difficult,” Ritchie explains.

For those who work in private equity, it’s therefore more important than ever to appoint a wealth advisor with specialist knowledge of their financial profile and experience in looking after other senior figures in the industry. Given the sums at stake can be substantial, the risks of not having proper advice can lead to a wide range of challenges, from future wealth creation and managing the impact of tax and inflation, to borrowing to buy property or even keeping the estate intact beyond their lifetimes. Here are a few tips to ensure they’re on the right track:

1. Rethink the search for yield

It’s common for private equity professionals to hold pots of cash to meet upcoming needs, such as future commitments to their funds, tax bills or deposits on property purchases.

But with such a disparity between the current rate of inflation and yield on cash, it can be challenging to avoid erosion of capital. This is especially relevant for cash sums earmarked for a tax payment in as much as nine, 12 or even 18 months’ time – not an uncommon occurrence.

“One of the conversations we are having is, ‘Are there ways to help limit the need private equity professionals have to hold substantial cash in the first place?'” says Ritchie. “There might be other ways to help them meet cashflow commitments, for example borrowing against property or investments.” There are also ways to increase the yield on the cash they do hold, such as investing in short-term fixed income instruments, capital protected structured products and cash enhancement strategies.

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2. Consider your wider needs when obtaining a mortgage

With such a high proportion of earnings derived from carried interest – and given the largely illiquid nature of their asset base – most banks are unable to lend sufficient sums to private equity executives to meet their property purchase aspirations. Lenders that can take into account carried interest when assessing a mortgage and have the ability to lend a high loan to value against a property are in a strong position to add value. In particular, a high loan to value mortgage effectively translates to a much smaller deposit, enabling these professionals to remain prepared for opportunities for further investment into their fund or elsewhere.

Recently, a managing director at a large global private equity firm was buying a new home for his growing family. ”Using a multicurrency revolving mortgage, we enabled him to draw up to 85 percent against the value of the property,” says Saiman.

“He ended up drawing 65 percent on day one, with a view to using the 20 percent headroom to meet future liquidity needs, such as his upcoming general partner (GP) commitments in USD. He plans to repay a portion of the loan when his next tranche of carried interest is realised, and then continue to use it to meet his GP commitments and for ad hoc investments in US Dollars or Euros”

Using this structure gave him the opportunity to accomplish his property goals while also saving time and cost managing currency needs.

3. Handle tax obligations intelligently

For private equity professionals, their tax obligations include addressing “carried interest” from specific transactions.

“With carried interest generally forming the largest portion of a private equity professional’s earnings, understanding what reliefs are available can help to maximise the value of the payment and defer gains to a later date or indefinitely in some cases,” says Saiman.

In the UK, those carried interest realisations are treated as capital gains and taxed at a current top rate of 28 percent. Reinvesting gains in companies accessing finance under the Enterprise Investment Scheme (EIS) offers a way to defer a capital gain, if qualifying criteria are met. These investments also allow the investor to potentially reclaim 30 percent of their total investment against their income tax liability.

4. Establish an estate plan

With a demanding work schedule and little free time, for private equity professionals, estate planning is often overlooked. The importance of establishing a plan deserves personal attention so loved ones are protected in the case of a life-changing event, such as illness or death. If the worst occurs and an estate plan has not been sufficiently addressed, heirs could be subject to huge tax burdens or unprepared to manage major financial decisions. And these professionals typically have high lifestyle expenses and limited personal liquidity outside of their fund commitments, making it a complex situation for a family to manage.

In one recent example, a principal of a private equity fund and his wife came to RBC, concerned about how the family would pay for life’s expenses if anything were to happen to the husband prior to future carried interest being realised . “The concept of high-value life insurance was introduced to plug that gap,” says Ritchie. “That way the couple knew they could cover the mortgage on their property and pay their children’s school fees all the way through to university.

“That conversation highlighted a blind spot for the client and the solution will relieve a huge burden at a very emotionally straining time.”

With the help of advisors who understand their unique personal finance structure, private equity professionals can avoid critical missteps, take advantage of their unique earning power, and ultimately free up time to focus on what matters to them.


This publication has been issued by RBC's Wealth Management international division in the United Kingdom and the Channel Islands which is comprised of an international network of RBC® companies located in these jurisdictions and includes RBC Europe Limited and Royal Bank of Canada (Channel Islands) Limited. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by RBC's Wealth Management international division. This publication has been compiled from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, the value of investments and income arising can go down, future returns are not guaranteed, and an investor may not get back the amount originally invested. Countries throughout the world have their own laws regulating the types of securities and other investment products and services which may be offered to their residents, as well as the process for doing so. As a result, any securities or services discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law none of the entities which comprise the international division of RBC Wealth Management nor any of their affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Wealth Management. Clients of RBC Europe Limited may be entitled to compensation from the UK Financial Services Compensation Scheme (FSCS) if it cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. For further information about the compensation provided by the FSCS scheme (including the amounts covered and eligibility to claim) please refer to the FSCS website FSCS.org.uk. Please note only compensation related queries should be directed to the FSCS. Royal Bank of Canada (Channel Islands) Limited is not covered by the UK Financial Services Compensation Scheme. RBC Europe Limited is registered in England and Wales No. 995939. Registered Address: 100 Bishopsgate, London EC2N 4AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.

This publication has been issued by Royal Bank of Canada on behalf of certain RBC ® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.


The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.


This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither Royal Bank of Canada nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Royal Bank of Canada.


Clients of United Kingdom companies may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. The Channel Island subsidiaries are not covered by the UK Financial Services Compensation Scheme; the offices of Royal Bank of Canada (Channel Islands) Limited in Guernsey and Jersey are covered by the respective compensation schemes in these jurisdictions for deposit taking business only.


Wealth planning starts with a conversation


Talk to a relationship manager and put your wealth plan on a path for success.

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