I've never bought this particular argument. I think you can affect the decision on what investment to make by preferring some over others, but I think capital gains rates have relatively modest impact on the saving/spending decision.

In this case, you eliminate an advantage the venture investing currently has over investment banking, and a bunch of investment houses think about emphasizing their fee-based businesses a bit more and their investment businesses a bit less. But the masters of the universe still consume all they want to consume, and will do a fine job of keeping the yacht-builders employed.

Question
 

Good suggestion - I'm going to Chevy's for lunch.

Question
 

He who dies with the most toys is still dead.

Part of the 2% covers the manager's expenses, so it's actually somewhat lower than that.

Of course, that's what pays for office space and related expenses and base salaries for the associates. No one's getting rich on the 2, but no one's going broke, either.

And this depends heavily on fund size - the old $100 million dollar funds usually made very modest amounts off the 2%; the more recent billion dollar funds with the same number of GPs have found the 2% to be a goldmine.

Is that true? Passive investors get to deduct investment costs from OI rather than capital gains?

If I were cynical, I would suggest that the Democrats will flirt with enacting this tax change only to have the effort fail at the last moment, leaving it on the table for next year, and ensuring a continuing flow of campaign contributions from the industry to the politicians involved.

I would think. It's only if you achieve returns of more than 10% per year before the 20% exceeds the 2%. In a rising market, that's going to happen. But the 2% isn't nothing.

They have to run the gamut of limitations based on amount at risk etc., which is why you could end up with the cap gains/ordinary income mismatch.

And there will be a cost someone will need to bear for lawyers and accountants.

If the expenses eat up 75% of your 2%, you only need returns of 2.5%.

If the expenses eat up 20% of your 2%, you need returns of 8% per year.

So it depends on the size of fund, since in big funds you can be closer to the 20% and in small funds you can be north of the 75%.

More progress in Iraq
 

Like Rats from a Sinking Ship
 

translation: I'm bitter W didn't give me a job in his admin despite my outdated cred from the Reagan era.

Question
 

The comic book collection.

And his collection of bobbleheads from the '93 Phillies.

Bullshit
 

The carried interest is compensation. Just like the stock options and restricted stockgrants corporatee drones get. Just like the commissions the stockbrokers and other peddlers get. Just like the management fee. It's income. It's not capital gain for the PEs. They never put capital in. That's why it's called a "carried" interest.

NO they aren't. They are still puting in the 1% of equity they have always put in, and they are getting a return on that equity investment. The funds are getting bigger because (i) more institutions are investing in PE and (ii) the funds are using more leverage.

Bullshit
 

Wait. You meant there's no difference between having a flow through interest in a partnership and having an equity interest in a corporation?

And last time I checked, my guys took their restricted stock into income based on its current value and all the gain was... well... gain.

Also, are you suggesting that when they have both a carried interest and an investment interest (because in my deals they always do), that they have two separate interests in the partnership, not a single unified interest?

So on the issue of the aggregate versus entity approaches to partnerships, are you going to advocate a consistent entity approach - just like corporations?

Bullshit, part 2
 

Ah, so you admit you're wrong about them putting money in?

You're forgetting about employment taxes and the fact that a huge chunk of the money in the funds is tax-exempt.

When you're talking about a $250 million fund, that "expenses" notion becomes downright funny.

It depends. Some of the costs have to be allocated to the cost of acquiring the asset, which is capital. But the biggest chunk of money is from the tax-exempts, so they don['t deduct it at all. Of course, they also don't pay any tax on their income or gains.

See about 2/3 of the way through for exempt orgs - you're gonna figure a way to specially allocate those deductions, aren't you?

If this is really all about 1.5%, there's gotta be a better way.

Think you can figure out a way to give an interest in a start up entity to Manager cap fund cheap, because nothing is in start up entity, then enter into a 2% management fee deal with Manager employment corp, which of course is wholly separate, and then layer a preferred interest that takes 80% on top of that cheap start-up equity?

I have faith that you can structure around this one. Maybe there's some tax revenue while you figure it out.

Question
 

Ooooh. Minimalism.

Bullshit
 

No.

What your guys are doing is recognizing income based upon the diffference between what they pay for the stock and its value at the time it vests, unless they were able to make a section 83(b) election to take it into income earlier.

Yes. For one thing, they need to track their capital accounts separately. They also need to mainatina different interests to account for the flow of funds through the waterfall.

When it comes to compensatory interests, fuck yeah.

etft -- t.s.

Bullshit, part 2
 

I wasn't wrong. They don't put in any money for the carried interest. That's why they call it "carried."

Bullshit
 

Has anyone in a start-up ever not filed an 83(b) election?

I mean, anyone who didn't subsequently sue their lawyer or accountant?

Bullshit, part 2
 

Hmmm. Yet, the investors always want to see that the money is in, and may even condition their investment on it - could the two, perhaps, be, uh, related?

Please clarify what you're saying here. I don't understand your meaning.

Bullshit
 

Anybody who got NSOs or SARs, for which an 83(b) election is unavailable.

Bullshit, part 2
 

No. Actually, the 1% is there more for the fact that a GP has to be a partner from the outset. A carried interest is not a partnership interest at the outset, because it is not a capital investment in the venture.

I'm just saying this may change the way deals are structured, but they will get to the same place at the end of the day.

Because, at the end of the day, if you invest $10 million into a company and get a $50 million return, there is $40 million of gain.

Bullshit
 

You're dealing with a different world, and I was responding on restricted stock. The post in question was :

The point is, there are service providers in corporations who realize capital gains on their return, even if their initial interest was received in connection with services. The VCs are in a similar position on the carried interest - isn't the right compensatory value the value on day 1, before a dime has been earned? After that, they are just getting a piece of the gain.

True. And the boys and girls getting paid $8 million of that gain will be taxed on their share with a W-2, the same way everybody else who earns compensation for services is.

Bullshit
 

Oops - belongs i post above.

Somewhat, but the expenses for funds is not static. It takes more to run a bigger fund.

Not significantly more. I see their tax returns and financials.

Surprisingly, not much more the way they've been structured.

Ten years ago, the average $100 million fund would likely have 3-5 principals who be picking about 4 companies each, with varying investments in each of the 4 companies.

Today, I'd guess the average billion dollar fund has 4-6 principals who are picking about 4 companies each.

But the investment size is bigger. They've added a few bells and whistles to help them pick better or to provide some additional leverage to their investments (e.g., HR specialists, more skilled analysts, etc.), but really not much.

In my experience, it depends on the fund and the types of investments pursued.

In most cases I agree with you. But some funds, like those specializing in overseas investments, have significantly more operating costs than those throwing darts at a board made up of US public cos.

Think this way, and all your clients will be mine!