The fund manager knows that some portion of their investor base will be paying additional corporate taxes through their blockers. This reduces the after-tax returns those investors can expect, which means the fund can afford to pay slightly less for acquisitions while still meeting their target returns for the direct investors.
Private equity fund tax basics. Also levered blockers and very detailed explanation of why they make sense versus regular blockers.


Creato da alumni della Columbia University a San Francisco
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Creato da alumni della Columbia University a San Francisco

Lena: Hey Miles, I was talking with a friend who's investing in a private equity fund, and she mentioned something about "blocker corporations" that completely confused me. She said some investors use them, but others don't? What's the deal with these things?
Miles: Oh, blockers! They're actually fascinating, Lena. Think of them as tax shields. Essentially, they're corporations that sit between certain investors and a fund to prevent unwanted tax consequences from flowing directly to those investors.
Lena: Wait, so it's like... putting up a wall between you and taxes? That sounds too good to be true.
Miles: Well, not exactly. It's more about who needs them and why. For example, tax-exempt organizations like pension funds or endowments, and foreign investors, often use blockers to avoid specific tax headaches they'd otherwise face.
Lena: Right, but why wouldn't everyone use them then?
Miles: That's where it gets interesting! Blockers come with their own costs. They're taxed at the corporate level—currently 21% federal rate—and can create double taxation in some scenarios. What's fascinating is that in private equity deals, these blockers can actually reduce the overall purchase price for everyone involved, even investors who don't use them. Let's explore why certain investors need blockers and how they impact the economics of private equity investments.