By Chibuike Oguh

(Reuters) – TPG’s top dealmakers are going to force TPG to pay the cash value it anticipates receiving in tax savings. The current estimate is $1.44 Billion. This figure was revealed by a regulatory filing.

Since Blackstone’s IPO in 2007, Blackstone (NYSE:) Inc has used the practice to their advantage. Private equity firms claim the arrangement allows them to reward their partners. They are accused of denying their shareholders value that ought to have been given them by the private equity firms.

Robert Willens (a Columbia Business School professor and tax expert) said there is a danger that IPO investor may not be able to appreciate the amount of value being transferred from private equity firms to its founders. This was due in part because the process can be complex.

Willens explained that “public investors might be paying too much for this stock. They may not understand its implications.”

TPG declined to comment.

TPG’s reorganization and public listing will provide tax benefits. TPG will benefit from the acquisition of the operating partnership interests of its founders, which will allow it to increase its tax base, and take amortization and depreciation deductions, to reduce its taxable income. The filing indicates.

According to filing, TPG entered into “tax receivable agreements” with its founders in order to pay them 85% cash value for these tax savings.

Fort Worth-based company, which is headquartered in Texas, stated that the value of its assets, currently valued at $1.44 trillion, could “materially differ” when the tax savings are realized. The firm stated that the amount it would have to pay under the agreement is substantial and could cause a material negative impact on its cash position.

TPG announced Tuesday that it anticipates being worth $9.5B in its IPO. The tax receivable agreement would then transfer 15% to TPG’s highest dealmakers, namely founders Jim Coulter, David Bonderman, and chief executive Jon Winkelried.

Bonderman, Coulter and Coulter already have billionaires. The $1.44 Billion payout will further boost their fortunes. Forbes puts Bonderman’s and Coulter’s net worth at $4.5 million and $2.6 million, respectively.

TPG will pay interest equal to one year LIBOR plus 5% if it fails to make tax receivable agreement payments on time. TPG is liable for any remaining tax savings if there’s a change in control, like if its founders give up their dual-class shares.

This happened in the last two years when the founders of peers KKR & Co (NYSE:) Inc, Apollo Global Management (NYSE:) Inc and Carlyle Group (NASDAQ) Inc decided to give up the voting power and transform these firms into corporations using a single type of stock.

This triggered a $560m payment to KKR founders in accordance with their tax receivable arrangement. New York-based KKR stated it would pay the cash as stock.

LAWMAKER SCRUTINY

Apollo’s founding executives and officers secured at most $584m over four years under its tax receivable arrangement. This agreement was in place when Apollo announced that it would be eliminating its dual-class structure last year, according to regulatory filings. They chose not to own Apollo stock but received the payment in cash.

According to a source, the payment was only worth half of accrued tax benefits due to founders. They agreed to forfeit the remaining half for Apollo’s shareholders.

Carlyle became the first publicly-traded private equity firm to abolish special voting rights in 2019 for its executives. According to regulatory filings, the change resulted in a cash payment of $346 million over five years to Carlyle’s executives.

U.S. lawyers were concerned about the use of tax receivables agreements by private equity companies in 2007. Blackstone, in its IPO filings disclosed that its executives could get tax benefits in excess of $863.7million over the course 15 years.

U.S. Congress didn’t pass any legislation that would tax income earned through tax receivables. Tax receivables became more popular and private equity firms began to use them in order to get value out of portfolio companies that they made public.

Private equity firms often use high-priced tax attorneys to protect their portfolio companies. Therefore, it is not surprising that they also use complex tax tricks to their benefit,” Ludovic Phalippou (a professor of finance at Oxford’s Said Business School) said.