If you get offered Co-invest, which I would assume would be offered mostly at small SMs, can you have your bonus reinvested without being payed out immediately? With the intention of paying cap gains rather than income tax.
Does this arrangement exist/ is it common?
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Yes you can directly invest your bonus into the fund. At my fund it is for the most senior people (not very common) but I believe others are more loose with this.
Investing your bonus with the fund would still mean no tax advantages.
"Carry" as a tax advantage is 99% of the time a PE thing, not a HF thing.
The tax advantage is investing the full amount pre tax. That’s all.
Not a tax professional, but all firms that I have worked for in the past require reinvestment on after tax income. But I think it might be different if you are an owner/member/partner of the firm
Unless you have a legitimate economic interest in the GP itself (i.e. were part of the formation of the fund and negotiated this) and are on a K-1 as a result then you are just a W-2 Employee receiving a bonus, that you can invest after tax.
Sometimes you can or have to invest part of your bonus in the fund (which usually has some sort of vesting 2-4 yrs) pre-tax. So if you get a $500k bonus it goes into the fund. Fund goes up 20% it goes to $600k. When you take out your money you pay full ordinary income tax just like any other W-2 paycheck. The small benefit comes from compounding at pre-tax dollars and the fund paying your dividend tax, so thats helpful but nothing like PE style tax benefits.
In short basically dont assume any meaningful tax benefits.
This can happen if you are paid in fund units / actual share of the incentive allocation instead of a W2 cash bonus from the management company / fund expense.
in ~8yrs of this I've averaged about 5-10% less than ordinary income tax rates, and that is probably higher than typical. obviously depends a lot on strategy composition and filing structure of fund.
Is there some benefit to deferred comp at the pods? Maybe citadel with compounding >20%?
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