Private Equity Circling the Wagons Over "Carried Interest" Tax Threat

When private equity funds are successful, their general partners/managers derive income – sometimes a great deal of income – from something called “carried interest.” Essentially, carried interest represents the managers’ share of the profits - usually 20% - beyond a given “hurdle,” or return guaranteed to investors. The calculation can differ, whether it be investment by investment, or overall. But the deal can be, and usually is, very sweet for the GPs. To make the system even sweeter for the privileged few, this income is generally taxed at a preferred rate of 15%, far below the rates paid by the Jill and Johnny Lunchpails of the world.

For some time now, calls have gone out afar and near to redress this perceived injustice and to raise revenue at the same time, by taxing carried interest as what it really is, ordinary income in the hands of the managers. After a brief repose, the issue arose again last week when President Obama had the gall to suggest changing the rate in his budget request.

Of course, this has the private equity industry, and its legislative lackeys in Washington, in a tizzy. Arguing that any such move would impact venture capital in general, adversely affect small partnerships the world over, hinder job creation at home, and lead to the downfall of civilization as we know it, the industry is once again girding for battle.

It will certainly be on the minds of many as they board their private jets and head to the 13th Annual International Private Equity & Venture Capital Conference, which convenes today in Berlin. And, no doubt, it will remain high on the agenda for those in attendance.