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With markets opening during the past year, private equity firms are becoming more interested in the fitness industry. Industry insiders say that the industry’s recession-resilient reputation, increased mergers and acquisitions in the industry, plus an impending capital gains tax deadline have led to more activity as 2012 heads down the home stretch.
Tax Deadline
The impending sale of 24 Hour might not be the only reason for a seemingly higher interest in club sales and purchases. Some of that interest can be chalked up to taxes. The George W. Bush tax cuts are set to expire on Dec. 31. Long-term capital gains rates will increase from 15 percent to 20 percent, and as a result of the 2010 health-care law, an additional 3.8 percent for high-income earners will be added, according to a Bloomberg report last month. For that reason, financial advisers are encouraging their clients to sell their businesses now.
Mastrov says the capital gains rates could reach 25 percent. If a 3 percent tax increase on the ballot passes on Nov. 6 in California, that, too, will become a burden to businesses in that state. (Update: Proposition 30 was approved in California.)
“You’re trying to avoid that additional 10 percent tax,” Mastrov says. “If you’ve got $1 billion of equity in your company, another 10 percent is $100 million in tax.”
Companies have a lot of capital in funds that they are looking to deploy, adds Mastrov, whose own NeV fund partnered with private equity firm Vision Capital in 2011. Crunch, New York, is co-owned by NeV and another private equity firm, Angelo Gordon and Co., which originally bought Crunch from Bally Total Fitness, Chicago, with Marc Tascher in 2005.
“Whether it’s a hedge fund, whether it’s a private investment group, a lot of folks have a lot of capital, and they’re trying to find good, safe places to put it to work with pretty strong return dynamics,” Mastrov says. “Our industry is one of those that has shown consistent return on capital, it’s shown good growth on its cash flow and it’s performed well in the downturned economy.”
Bryan O’Rourke, CEO of Integerus, Covington, LA, concurs with Mastrov, saying there is a lot of “dry powder” on the sidelines from private equity firms waiting to deploy. The fiscal cliff the U.S. government faces at the end of the year, when the terms of the Budget Control Act of 2011 are scheduled to go into effect, is a significant factor in deals considered by private equity firms, which are expanding their investment choices, O’Rourke adds.
“Some are buying venture capital portfolio companies, making riskier investments and even expanding into the hedge fund world,” O’Rourke says. “While many of these firms do not view the impending fiscal cliff with as much fear, some do.”
