VSS Takes Minority Stake in Tax Credit Co.
Veronis Suhler Stevenson plans to make returns a top priority with its latest investment, namely tax returns.
The New York firm has taken a stake in Tax Credit Co., a Los Angeles business that helps companies identify and take advantage of various federal and state tax credits, including research and development tax credits, state enterprise zone and economic development incentives and Work Opportunity Tax Credit incentives, according to a news release.
Although terms of the transaction weren’t disclosed, VSS took a minority stake in the company, providing it not only with some capital for growth and liquidity but also allowing Tax Credit’s owners to maintain control, said Jeffrey Gordon, a director at VSS that worked on the deal.
VSS invested in the company through VSS Structured Capital II LP, a $312 million fund raised in 2009 that targets investments in minority and mezzanine stakes. Tax Credit is the eighth deal that VSS has backed out of its VSS Structured Capital II, which is a little more than halfway deployed, according to Mr. Gordon.
Intrepid Investment Bankers advised Tax Credit on the transaction.
Mr. Gordon said that Tax Credit has particularly strong expertise in California enterprise zone tax credits, federal and state research and development tax incentives as well as WOTC incentives. He added that federal and state research and development tax credits average about $9 billion annually while WOTC incentives ,which provides credits to companies that hire certain types of people such as veterans, average about $1 billion annually.
However, because identifying and obtaining these credits is complicated many small businesses do not take advantage of them, which is where companies like Tax Credit come into play.
“It takes time and it’s just not worth the effort especially for small businesses that don’t have the scale and the employee base to spend hours and hours to do this,” Mr. Gordon said.
Although Mr. Gordon acknowledged that potential changes in U.S. tax code could certainly pose a risk to businesses like Tax Credit, the tax credits that the company targets, such as research and development incentives and the WOTC credits, tend to be less controversial than do tax cuts related to individual income taxes.
“These credits promote hiring and economic activity in the United States, so they have a lot of bipartisan support,” he said.
Tax Credit isn’t VSS’s first taste of the tax credit services space. Managing Director Michael Kessler , who led the investment in Tax Credit, also worked on the sale of tax credit service provider CIC Enterprises to First Advantage Corp. in 2005. VSS was one of the investment banks that worked on the deal.
The Tax Credit transaction draws on VSS’ expertise in both human capital management and data services. VSS has worked on a number of other transactions in both spaces, but one that closely resembles Tax Credit, according to Mr. Gordon, is the firm’s investment in London-based talent management and recruiting company SHL, which the firm sold to Corporate Executive Board earlier this year.
VSS is hardly the first private equity firm to delve into the tax software and services sector. Earlier this month, Vista Equity Partners bought ADP Taxware, which makes software that helps businesses calculate sales and tax compliance, from Automatic Data Processing Inc. Meanwhile, early this year, TA Associates sold 2nd Story Software Inc., which does business as TaxAct, to Infospace Inc.