Here’s the playbook I shared with a PE partner yesterday
They tend to have:
• Large capital gains from deals and carried interest
• A lot of $ tied up in funds and co-investments
• Lumpy, unpredictable cash flows
• Sporadic capital calls across many funds
So here are some ideas that can help:
1. Harvest capital losses where you can
If you're going to own public equities, I'd generally rather own a direct index than an index fund.
The ability to systematically harvest capital losses can become incredibly valuable over time when you're constantly realizing gains elsewhere.
2. Solve the liquidity problem
One of the biggest reasons I think PE partners should hire a financial advisor is liquidity management.
Rather than keeping millions sitting in cash waiting for the next capital call (or selling appreciated securities every time you need liquidity) I generally prefer low-cost box spread financing when capital calls arrive. You can have the cash the next day and you’ll receive capital losses on the interest, which you can never get enough of as a PE partner.
3. Level up the tax-loss harvesting
Once you have a liquidity plan in place, I'd consider layering in a tax-aware long/short SMA.
Unlike direct indexing, these strategies can continue harvesting losses in environments where traditional tax-loss harvesting becomes more limited.
The sequencing matters, though. I generally wouldn't want someone relying on a long/short equity portfolio to fund capital calls because of the inherent volatility. Get the liquidity framework in place first.
4. Think differently during the big gain years
Suppose you have a $3 million capital gain year.
Rather than simply paying the tax and moving on, I'd think through several opportunities:
• Add capital to tax-aware strategies to begin harvesting losses immediately.
• Evaluate whether a Qualified Opportunity Zone investment makes sense to defer part of the gain while giving tax-loss harvesting more time to work.
• If you're charitably inclined, consider bunching deductions through a Donor Advised Fund rather than making the same donations every year.
Match the lumpy gains with lumpy deductions.
5. Don't ignore ordinary income planning
Most people don't have much sympathy when PE partners complain about taxes from their W-2 income because carried interest is one of the most attractive forms of compensation in the tax code.
BUT I CARE! 😜
Depending on your circumstances, tax-aware hedge funds, real estate (particularly if you or your spouse qualify as a Real Estate Professional), or certain energy investments may help reduce the ordinary income tax burden while also adding diversification.
If you found any of this useful, please send it to another PE partner you know so they can level up too!