An initial public offering (IPO) is a milestone for any company seeking growth. An IPO offers a company liquidity for its owners, an ability to more easily raise capital to support future growth, and enhanced reputation. However, for pass-through entities, the benefits of an IPO have required such entities to forfeit the economic and tax benefits of operating as a partnership, or other type of pass-through entity. An umbrella partnership C corporation (Up-C) structure allows a pass-through entity the best of both worlds, achieving preferential tax treatment for both the pre-IPO investors and the new publicly-traded corporation, while also enjoying access to the capital markets.
Over the past few decades, the popularity of Up-C structures as a means to access capital markets for companies contemplating an IPO has significantly increased. An Up-C structure can be utilized by companies across all industries and sectors, but is particularly common for private equity portfolio companies.
In the accompanying example, the operating pass-through entity first “unitizes” its interests so that each unit has the same economic rights. Then in conjunction with the IPO, PubCo typically issues two classes of common stock:
As a result of the IPO, the pre-IPO investors may either retain their interests in the operating pass-through entity, or choose to liquidate their investment. To do so, the pre-IPO investors may either elect to redeem a portion of their interests for cash raised in the IPO, or to exchange those interests for public-traded PubCo Class A common stock.
To affect potential future redemptions and exchanges, the pre-IPO investors and PubCo typically enter into two agreements:
Like a traditional IPO, an Up-C structure carries a variety of accounting and tax complexities and associated administrative burdens that are unique to the structure. Such considerations typically require support and advice from individuals who specialize in these fields and may also require ongoing record-keeping and maintenance.
An Up-C structure can provide substantial benefits to any organization pursuing an IPO. Companies should carefully weigh the potential benefits and burdens when selecting an optimal IPO structure for their exit, and begin planning well in advance of their IPO. Key stakeholders should be identified early in the restructuring process and companies should evaluate the resources needed to meet the demands of maintaining a corporate and pass-through structure as well as compliance with SEC requirements.
Contact your PwC advisor for more information and to discuss in an Up-C structure might be appropriate for your organization.
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IPO Services Co-Leader, PwC US
Principal, M&A Tax, PwC US
Tax Partner, PwC US
Deals Senior Manager, PwC US