Buying a GP Stake: PwC

The deal looks good — now check the ingredients

You’ve found her: the chef with star potential. Her kitchen runs hot, her brand is ascending, and every plate delivers both artistry and margin. Now, you're wanting to partner with her — not just to fund her next restaurant, but to grow her global brand, develop new products and share in the growth of that brand while recognizing a current economic return.

But backing a star chef — like buying a general partner (GP) stake — means more than savoring current and future returns. It involves complex ownership options and structures, tax exposures, profit allocations, information rights and partnership mechanics that will define your seat at the table. Because in this business, flavor brings the customers, but the fine print defines the deal.

What’s on the menu?

It’s important to understand what you’re actually buying when you acquire a GP stake — from the steady income streams and tax implications to how the capital is used and where the real upside lies. Each source of income carries a different tax character, and that can shape both the structure of the deal and your after-tax return. Defining the deal perimeter will help shape the menu and the future of the business.

Let’s start with the staple of any GP’s revenue stack — management fees. Think of this as the bread and butter — always present, relatively predictable (typically calculated as 1%-2% of committed or invested capital) and foundational to the firm’s operations.

From a tax perspective, management fees are typically treated as ordinary income. For US- based managers, these fees would be effectively connected income (ECI). You should consider the portion of value attributed to these fees and whether there are opportunities to manage the tax impact, especially for non-US investors who can’t receive this income directly. Corporate structures owned by a fund consisting of investors who are sensitive to Unrelated Business Income Tax (UBIT) and ECI will be used to own this fee stream.

Now we get to the main course — carried interest. It’s the real flavor — and upside — of a GP stake investment.

Carried interest is the GP’s share of profits from the fund, typically around 20% of the fund’s gains. These profits, especially for private equity, are often taxed at favorable long-term capital gains rates if the holding period is more than three years.

Things get more complex when the GP is exposed to multiple funds at different stages. Some carry vehicles may be actively paying out profits, while others are early in their investment cycles. There’s additional complexity when acquiring an interest in existing carry with built-in gains such as in private equity, infrastructure or real assets, or when part of what you’re buying relates to ordinary income-generating assets rather than capital gains (such as private credit or hedge funds). These factors can influence both how your return is taxed and how the deal may be structured to avoid unexpected tax consequences.

Buyers should actively model the tax impact of buying existing carry versus future carry.

It’s not just about what you’re served, but how your capital will be used to shape the next course. Buyers typically fund one or both of two “dishes.”

Primary investments support growth — funding new funds, team expansion or tech upgrades.
Secondary investments provide liquidity by cashing out legacy partners, managing succession or de-risking key talent.

Many deals blend both. Understanding the mix is essential, as each use has different implications for value creation, alignment and tax treatment.

Inspecting the kitchen: Buy-side diligence with a tax lens

Look past headline economics to evaluate fundamentals, especially the financials, tax exposures, legal structure and ownership mechanics that will shape your GP investment. Smart buyers approach this process with a tax-aware lens — because even small details, if overlooked, can lead to significant issues down the line.

A GP firm must have clear, well-documented financials and structural clarity that are ready for your review. Most privately held asset managers don’t have audited financial statements for the management company. Also, there may be multiple general partner entities (one for each fund). Therefore, begin diligence with these factors in mind:

Consolidated financials aligned with the deal perimeter to validate fee-related earnings, performance-related earnings and distributable earnings — which may be highly adjusted. It’s critical to understand the bridge to historical actuals.
A clear legal entity structure to understand how management fees and carry flow through.
Governing agreements that clarify ownership, rights and allocation mechanics.
Review of buy-in/buy-out mechanics, including any step-up elections.
Assessment of ECI risk of the funds’ activities (flow through portfolio companies for private equity, direct lending and real assets) and withholding obligations, especially for non-US buyers.
State and local tax apportionment and leakage — which can vary significantly based on where the firm and its clients are located for the management fees as well as income from flow-through portfolio companies, real estate or direct lending.

Understanding who’s in the kitchen, and how long they plan to stay, is critical to assessing the durability of your target’s value.

Conduct diligence on the investment and operations teams — not just the founders, but the next generation of leadership. Who’s driving returns? Who’s managing relationships? Are they incentivized to stay?
Evaluate succession plans and key personnel to understand how the firm handles leadership transitions. Pay close attention to essential team members — including non-partner professionals — whose retention is critical to sustaining performance and client relationships.
Analyze compensation structures, including how carried interest is shared. Are there deferred carry plans, retention bonuses or equity incentive programs that align talent with long-term performance?

Before you commit capital, you need to know how a target company runs, who runs it and whether the economics and incentives are built to last. GP stakes capital can enhance and accelerate succession planning and incentivize the next generation of leaders. Structuring the tax aspects of an incentive plan can be complex. Plan carefully to avoid phantom income, offer sellers tax-efficient ownership transfers and give buyers confidence in their ownership structure.

Plating the price

Each component of a GP stake contributes differently to value — and tax treatment plays a major role in determining actual return. Buyers should focus not just on economics, but how those economics are taxed.

Management fees = ordinary income
Future carried interest = potential capital gain
Existing carry = may contain built-in gain subject to recharacterization for sellers if not held greater than three years
Goodwill = amortizable under Section 197 (ordinary deduction against fee income) if properly structured

To model after-tax yield accurately, buyers must understand the timing, source (ECI versus non-ECI), state and foreign sourcing and character of returns.

GP economics are often spread across multiple entities — each with its own legal and tax profile. Valuation and purchase price allocation depend on not only what you're buying but how value flows through the structure and how it's taxed once it gets to you.

The valuation process begins with understanding the GP’s long-term earnings potential. This includes detailed due diligence on projected management-fee income, profitability, track record, limited partner relationships, fundraising strength and management capabilities as well as a clear strategic position in the market.

Management fees: Buyers typically price a transaction based on the mix of distributable earnings (management fees versus performance fees). Normalized profitability levels are often assessed against management fees only. Management contracts are viewed as the primary asset in an investment management business. For the seller, the noncancellable portion of the management contract, often referred to as a “hot asset,” is typically taxed as ordinary income, even if other elements in the transaction (including the cancellable portion of the management contract) are taxed at capital gains or more favorable rates. Understanding the seller’s motivations is crucial because it allows you to tailor your negotiation strategy effectively. And remember, the buyer and seller usually are required to agree upfront on the allocation. From a buyer’s perspective, the management contract is valued over the term of the fund and not simply the noncancellation portion for financial reporting purposes under purchase accounting. That means book and tax treatment may vary.

Performance-based, carried interest is subject to greater volatility. Buyers should assess the value of carried interest based on risk level.

Lowest risk: earned carry
Lower risk: unearned carry from existing funds
Higher risk: unearned carry from dry powder
Highest risk: unearned carry from future funds

If carried interest is part of the deal, buyers need to understand the potential risks and upsides. For sellers, the expected tax treatment (ordinary income or capital gains) can differ for each component of carried interest in the transaction. The treatment may depend on the vintage of the carry and whether the GP has been around for less than three years.

Buyers should assess where the value associated with the carry from dry powder and future funds resides, as there may be different tax implications if this value is deemed to sit at the management company versus GP entity.

These details affect valuation and your after-tax cash flow — and they’re often where you’ll find the deal’s “fine print.” Building a detailed forecast model with management fees and carry cash flow streams and sensitivities can provide deeper insights into the true economic value of the investment, helping you anticipate how changes in key variables affect returns. This approach enables you to make more informed decisions, improve deal structures and manage risks effectively by understanding the potential range of outcomes before committing capital.

Allocating purchase price among management company equity, carry and goodwill is critical — each bucket has distinct tax character and basis implications. Failing to allocate correctly may result in mismatched gain recognition, inability to amortize intangibles or unwanted ordinary income exposure. For example, ascribing value to the management company may increase the Section 754 step-up in a secondary transaction and allow offshore investors to contribute more capital to a levered US blocker.

Seasoning the deal: Structuring for tax and flexibility

How a GP stake deal is structured shapes not only the economics and alignment but also the timing, character and magnitude of the buyer’s tax exposure. For investors, structuring should align with the GP’s operating model as well as the buyer’s tax profile and long-term strategy. Flexibility and foresight are key. Thoughtful terms can preserve upside, mitigate tax friction and support future liquidity.

Form of the purchase

As a true sale from a seller, buyers will receive a step-up in basis in the form of Section 197 amortization of goodwill intangible over 15 years. Purchase price allocation between the management company and carry vehicles is key. The higher the purchase price allocation to the management company, the more valuable the step-up may be. Buyers should model the benefits of step-up from secondary transactions. Also, potentially adding leverage to a US corporate vehicles for non-US and UBTI sensitive investors is critical to determine a post-tax overall return for investors.

Sellers contribute cash to the management company and carry vehicles in exchange for a permanent ownership on a post-money valuation. Often the sellers use this cash to fund future capital commitments, new fund launches or provide operating capital to hire new investment professionals in the pursuit of a new investment strategy. Sellers don’t view this as a sale, so there’s no step-up and, therefore, no ability to amortize any of the purchase price. Buyers can still structure to mitigate tax leakage for non-US investors and UBTI sensitive investors by levering US blockers that receive ECI.

One of the newest and fastest growing deal strategies in GP stakes involves the buyer “purchasing” portions of management fee, co-invest and carry income (securitized assets) and receiving most, if not all of the income and cash, until the buyer receives a certain internal rate of return (IRR) or multiple on invested capital (MOIC). Many sellers use preferred equity to fund larger GP capital/co-invest commitments or to seed new products. Preferred equity has many of the same characteristics of common ownership and can be structured similarly as either primary or secondary or a combination of both. However, since the ownership isn’t permanent and the IRR is lower than common ownership, tax structuring and mitigating tax leakage are even more crucial. The transaction’s structure and the buyer's role post-transaction also can affect the character of the income received going forward. Section 1061 can tax gains from certain partnerships as short term to the extent assets have not been held for three years. Some contributions to the underlying GP interests may qualify for a capital interest exception and may be eligible for long-term gains after a one-year holding period. Other exceptions are predicated on whether the GP stakes fund provides services to the underlying manager, which is often the case. Evaluate these rules when structuring the deal and determine whether the implications are significant enough to justify modifying the structure or the buyer’s activities.

Closing time: Post-acquisition considerations

Buyers should negotiate clear notification and consent rights for material events that could affect the economics or tax profile of their GP stake. This includes changes such as new fund launches, GP restructurings or key personnel departures — circumstances that can affect profit allocations, carried interest participation or future cash flows.

From a tax perspective, deals that may generate unexpected ECI — such as US real estate investments, direct lending or operating businesses — should automatically trigger a consent so buyers can structure appropriately to mitigate additional tax leakage such as Branch Profits Tax or withholding obligations.

Don’t forget that tax information related to distributions should be considered to ensure buyers understand the tax sensitivity of the cash being received (dividends that require withholding on non-US investors).

The agreements should be very clear about deadlines for receipt of tax information (Schedule K-1 and estimates) so that GP stakes funds can provide this information to their limited and general partners. Sellers must understand the new owner is obligated to provide its partners with tax information early enough to timely file and make estimated federal and state corporate income and state withholding payments on behalf of its partners. Buyers should request estimated tax information by late winter and final Schedule K-1s by mid-summer so that tax processes can be properly managed.

Bon appétit!

A GP stake deal isn’t just about backing a rising star — it’s about navigating a layered, tax-sensitive capital structure while protecting long-term economics. Look beyond the menu to inspect the kitchen, plate the price carefully and season the deal with aligned terms and forward-looking diligence.

Tax is not just a line item — it’s an essential ingredient. Whether you’re structuring profit interests, allocating purchase price, managing ECI exposure post-close, or focusing on the process of receiving tax information, even small tax oversights can spoil the meal. With thoughtful structuring and sharp diligence, you’ll be ready to take your seat at the table — and enjoy the upside.

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Before you back the chef, understand the tax recipe behind a GP stake deal

The deal looks good — now check the ingredients

What’s on the menu?

Inspecting the kitchen: Buy-side diligence with a tax lens

Plating the price

Seasoning the deal: Structuring for tax and flexibility

Form of the purchase

Closing time: Post-acquisition considerations

Bon appétit!

US Private Equity Tax Services

Financial Services

PwC’s Financial services insights

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Contact us

Before you back the chef, understand the tax recipe behind a GP stake deal

The deal looks good — now check the ingredients

What’s on the menu?

Inspecting the kitchen: Buy-side diligence with a tax lens

Plating the price

Seasoning the deal: Structuring for tax and flexibility

Form of the purchase

Closing time: Post-acquisition considerations

Bon appétit!

US Private Equity Tax Services

Financial Services

PwC’s Financial services insights

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Contact us