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Deutsche Bank AG (DBK) said the IRS will allow the company to handle more trading between buyers and sellers of stakes in private buyout and hedge funds.
The bank’s year-old dbRemarket platform was designated a Qualified Matching Service by the U.S. Internal Revenue Service, according to a statement today. The designation means money managers can approve the sale of stakes accounting for as much as 10 percent of their funds through the exchange each year, up from 2 percent.
Private-equity investors including pensions, endowments and sovereign funds are seeking more flexibility to trade their stakes in funds that lock up money for 10 years or more. Carlyle Group LP (CG), the world’s second-largest buyout company, is marketing its latest flagship fund with a provision that allows investors to sell their interests at designated times twice a year, people familiar with the matter have said.
“This is becoming a part of the everyday private-equity business,” Lee Vecchione, a New York-based Deutsche Bank vice president responsible for sales of dbRemarket, said in an interview. “It’s a way for general partners to have more control over the process.”
General partners, as private-equity firms such as Carlyle and Blackstone Group LP (BX) are known, raise money from investors and usually pair it with debt to finance takeovers. Upon selling those companies through initial public offerings or to a corporation, they distribute 80 percent of the profits to their investors, called limited partners, and keep 20 percent for themselves.
Some limited partners opt to sell their interests before the end of the fund’s life through the so-called secondary market because they’re unsatisfied with the investment, they need money to fund obligations or they want to move into other funds. About $25 billion of secondary transactions occurred in 2011, according to a January report by Cogent Partners.
The dbRemarket exchange works like a sophisticated online auction, with sellers putting stakes in private-equity funds up for sale through a secured website. Buyers approved by Deutsche Bank and the private-equity manager can then bid on the stakes. Sellers can take one of several approaches, including a so- called Dutch auction, where buyers submit sealed bids and all successful bidders pay the lowest clearing price.
“That helps avoid the winner’s curse,” where the top bidder has to pay more than the market dictates the asset is worth, said Rob Sandt, a Deutsche Bank director and head of auction services.
The QMS designation allows a manager to use dbRemarket for as much as 10 percent of the fund in a year without triggering tax provisions that would classify a private-equity or hedge fund as a publicly traded partnership, Sandt said.
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