How the Proposed Tax Change Could Boost Returns for Private Equity Investors

March 24, 2025

The proposed change to the tax code, which would allow businesses to deduct depreciation and amortization (DA) when calculating tax deductions, offers substantial benefits for investors, particularly in private equity. The adjustment aims to make debt financing more attractive by enabling companies to deduct a larger portion of their interest expenses from taxable income. This effectively reduces their overall tax burden, which translates into more cash flow and profitability. For private equity investors, this provides a more favorable environment for generating returns on their investments. With larger tax deductions, portfolio companies experience enhanced financial performance, allowing them to invest more in their operations, expand, and drive growth.

Private equity firms, known for utilizing leverage as a core part of their strategy, stand to gain significantly from this change. When more of a company’s interest expenses are deductible, the tax savings boost the company’s cash flow, thereby increasing the value of their investments. By lowering the cost of debt, firms can also deploy more leverage in their deals, which enhances the return on equity. This has direct implications for private equity firms looking to optimize their financial strategies. More favorable tax treatment makes their portfolio companies more attractive, both in terms of profitability and valuation, which ultimately leads to higher returns upon exit.

For investors in general, this change opens up new opportunities. The increased profitability resulting from higher tax deductions strengthens the overall financial position of businesses, making them more appealing to potential buyers. Companies in capital-intensive industries, such as manufacturing, would benefit significantly, as their depreciation and amortization costs can be substantial. This could make businesses more competitive, foster job creation, and provide a greater chance for strategic exits, all of which would result in higher returns for investors. Furthermore, the broader application of this policy would impact a wide array of businesses, providing investors across various sectors with new avenues for growth and profitability.

Overall, the tax change is poised to create a positive feedback loop, where businesses benefit from reduced financial pressure, investors see better returns, and the broader economy gains from stronger, more profitable companies. For private equity investors, this change represents a strategic opportunity to enhance value, boost returns, and execute their long-term investment strategies with greater confidence and flexibility.