Meet your new thread, same as the old thread.

[Greedy,Greedy,Greedy]

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

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.

[Cletus Miller]

Originally posted by Greedy,Greedy,Greedy
Because they get to deduct the full $9.6 from their ordinary income.

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

[Tyrone Slothrop]

Originally posted by Greedy,Greedy,Greedy
By the way, I think this is just more Pavlov. The R congress enacted a bunch of silly stuff post-Enron because they had to do something; the D congress may just do some of the same.

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.

[Mmmm, Burger (C.J.)]

Originally posted by Greedy,Greedy,Greedy
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.

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.

[Greedy,Greedy,Greedy]

Originally posted by Cletus Miller
Is that true? Passive investors get to deduct investment costs from OI rather than capital gains?

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.

[Greedy,Greedy,Greedy]

Originally posted by Mmmm, Burger (C.J.)
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.

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%.

[Greedy,Greedy,Greedy]

At the Pentagon, meanwhile, Marine Gen. Peter Pace, chairman of the Joint Chiefs of Staff, told reporters that the number of battle-ready Iraqi battalions able to fight on their own has dropped to a half-dozen from 10 in recent months despite heightened American training efforts.

here.

Originally posted by Shape Shifter
Crazy liberal Peggy Noonan on W:

• Americans have always been somewhat romantic about the meaning of our country, and the beacon it can be for the world, and what the Founders did. But they like the president to be the cool-eyed realist, the tough customer who understands harsh realities.
  
  With Mr. Bush it is the people who are forced to be cool-eyed and realistic. He's the one who goes off on the toots. This is extremely irritating, and also unnatural. Actually it's weird.

http://opinionjournal.com/columnists.../?id=110010326

translation: I'm bitter W didn't give me a job in his admin despite my outdated cred from the Reagan era.

[SlaveNoMore]

ltl/fb
OK, so if you aren't giving anything up w/r/t food, drink, housing,* or car, what are you giving up?

The comic book collection.

And his collection of bobbleheads from the '93 Phillies.

[taxwonk]

Originally posted by Greedy,Greedy,Greedy
Several reasons, practical and theoretical:

(1) the risk takers bit is laughable - ask the fund managers who got sued for clawbacks after the nuclear winter hit the tech industry - this is a high-risk, high-reward business, and while the rewards seem to be rolling in at the moment, it wasn't that long ago that we were in the middle of a shake-out that ended a lot of careers;

(2) in reality, capital versus asset has little to do with risk versus non risk - capital is relating to investments, which can run from ultra-conservative bonds to wild-ass plunges into speculative start-ups; in this case, the carried interest is a piece of the underlying investment transaction, and is measured by and relates to the return on an investment;

(3) few fund managers have no investment in their partnership interest, though the investment is quite low compared to the interests held by the limiteds; the best argument for this is that it's really income relating to services provided to the investment vehicle, and there is a service component, but there is also an investment component and in many capital gains transactions some services accompany the investment (e.g., I buy a piece of real estate for investment purposes - over the years, I'm going to spend some time and energy managing it and fixing it up, all of which will enhance its value when sold if done right); and

(4) economically, the venture sector has been a driving force in the economy and capital gains have encouraged it; during the Clinton administration, there was very important tax legislation that was specifically designed to further incentive these guys (letting them roll over investments and giving them a preferred rate of return on investments in early stage companies), and that was part of the reason for Clinton's economic successes.

Some of this seems to be about the greedy New Yorkers at Blackstone getting piggy and effectively looking to sell of the future stream of income from these deals to the public; but this bill undercuts some of the most productive investment sectors around.

Rant over.

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.

[taxwonk]

Originally posted by Mmmm, Burger (C.J.)
More free cash for more investment. These guys aren't consuming most of the boo-coo dollars they pull in--they're plowing it back into the market. That's the other major point of low k-gains.

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.

[Greedy,Greedy,Greedy]

Originally posted by taxwonk
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.

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?

[Greedy,Greedy,Greedy]

Originally posted by taxwonk
They are still puting in the 1% of equity they have always put in, and they are getting a return on that equity investment.

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

[taxwonk]

Originally posted by Greedy,Greedy,Greedy
You know, the crazy thing is this may not end up generating any revenue.

Take the basic transaction: A group of people invest $10 million in Company A, hope to realize a 5x return and get $50 million. They're going to split it, with the people who put up $9.9 million will take about 80% of the $40 million gain and the people who managed the fund will take about 20%.

So, pre-bill, there is a $10 million investment and $40 million gain. You tax the $40 million gain at capital gains rates.

Now, you say to the guys managing the investment, wait, we think you're providing services, so we're going to tax your piece (about $8 million) at ordinary rates.

Well, the guys now structure this so they get a fee for $9.6 million. Why $9.6? They gross it up for the difference between about 15% and 35% tax rates. Why do the investors agree? Because they get to deduct the full $9.6 from their ordinary income. So, at the end of the day, there is still $40 million in capital gains, but there is also $9.6 million in ordinary income and a $9.6 million deduction.

There some chance of a gains/income mismatch generating some money, and some chances that the deduction would accrue to exempt orgs that can't use it, but, trust me, there will be ways to make sure the deduction gets used and the gross up occurs so that we end up in pretty close to the same place.

By the way, I think this is just more Pavlov. The R congress enacted a bunch of silly stuff post-Enron because they had to do something; the D congress may just do some of the same. But, if there were a Clinton in the corner office, there would be more thought given to the tax policy issues involved (as there was during his term). And Clinton was very good to the venture boys.

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

[taxwonk]

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

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