Comments (145)

Jul 30, 2022 - 11:56pm
zgzg914, what's your opinion? Comment below:

Not a Brandon fan but would still vote for him again over the maga clown ass that started his presidency blatantly lying that he had the biggest inauguration ever and ended it trying to overturn an election he got destroyed in. Not everything is about shareholder value and I'm not necessarily convinced based on history that one party or the other has done a unequivocally better job at managing the economy than the other. 

Jul 28, 2022 - 9:03pm
chimp4banking, what's your opinion? Comment below:

Most of the laws they're putting in place to take money out of rich peoples pockets are making it impossible for normal people to get rich!

  • Principal in RE - Comm
Jul 28, 2022 - 9:24am

Nobody is saying because it is unfair, they aren't happy to benefit from it. Most people in finance have benefitted from some type of unfairness (easiest example is being born to a good family that provides education opportunities, or even nepotism). Sucks to lose money you would otherwise have made. But what folks are saying is just because the change would hurt them doesn't mean "eff these politicians they are so dumb this makes no sense"

  • Associate 1 in PE - Other
Jul 28, 2022 - 11:15am

That makes no sense- obviously people prefer to pay less in taxes, they also are capable of logical thought and realize that there isn't a good reason for carry to be taxed at the capital gains rate rather than the personal income tax rate.

The only reason carry has been taxed at the lower rate for so long is because it effects a very small amount of high income earners and it was broadly overlooked/not discussed. 

Jul 28, 2022 - 10:30am
BankMeMommy, what's your opinion? Comment below:

So your solution to "unfairness" is to feed more money into our bloated government so that they can co your to allocate capital poorly? Hmm

Jul 28, 2022 - 12:26am
capex fairy, what's your opinion? Comment below:

It is functionally a fee for management services provided. Capital gains are taxed lower than income because they come with risk of losing your investment. The GP commitment is treated as capital gains, as it should since it's an investment the GP made with its own risk. The 20% performance fee doesn't come with any principal risk and should be taxed as ordinary income. 

If investment banking fees (which scale higher the better outcome your client receives) are taxed as ordinary income, then management fees should be as well. 

  • Works at Goldman Sachs
Jul 28, 2022 - 12:31am

capex fairy

It is functionally a fee for management services provided. Capital gains are taxed lower than income because they come with risk of losing your investment. The GP commitment is treated as capital gains, as it should since it's an investment the GP made with its own risk. The 20% performance fee doesn't come with any principal risk and should be taxed as ordinary income. 

I think principal risk is just one piece of it the carry is proportional to capital gain generated and so imo it should be taxed as such. I'm sure the structuring geniuses will figure something out. We put blood sweat and tears into the job fuck this. Lol at functionally a fee also, what?? 

Jul 28, 2022 - 9:11am
reformed, what's your opinion? Comment below:

If you're an LP yes. If you're an employee of the PE firm, no. Carry is really just another form of incentive compensation.

The argument for lower capital gains is you're getting taxed twice, which isn't the case for employees of a PE firm. 

t's pretty hard to argue it's not compensation when the PE firms themselves are making the argument to their employees that it's compensation. 

Array
  • 2
Jul 28, 2022 - 8:37am
Devils Advocate, what's your opinion? Comment below:

I know this sounds like a good talking point but Obama and Trump all advocated changing the treatment 

And Republicans didn't do high earners in blue states any favors with the SALT cap 

  • Associate 2 in IB-M&A
Jul 28, 2022 - 9:49am

Any why are property taxes high in blue states?  Have an issue with SALT then lower your property taxes like majority of states manage to do and still have functioning governments.

Jul 28, 2022 - 6:18pm
PetEng, what's your opinion? Comment below:

Democrats want more things. High income voters that vote Democrat should want to pay more taxes for those things.

  • Analyst 2 in IB - Gen
Jul 28, 2022 - 1:12am

Sinema has specifically stated that she is against this. In a broader sense, don't forget that she was against all of the tax components of last year's legislation. While I might be biased by my hope that this does not pass, I feel as if there is a strong chance that this is dropped; ultimately a very small part of the "revenue" component.

  • Intern in IB-M&A
Jul 28, 2022 - 2:02am

I feel like they'll can it eventually if not this time. Even trump campaigned against it a little

  • Analyst 2 in IB - Gen
Aug 4, 2022 - 10:27am

Circling back here, it looks like Sinema is seeking to remove this from the bill.

  • Analyst 2 in IB - Gen
Jul 28, 2022 - 10:07am

Where does it say that 5+ year holds are exempt (taxed at the LTCG rate via the "loophole vs. as ordinary income)? Thanks in advance!

Jul 28, 2022 - 9:15am
chromium73, what's your opinion? Comment below:

Except you've got to roll crystallized carry into the new fund so not sure how much it helps. 

Jul 28, 2022 - 10:51am
Alt-Ctr-Left, what's your opinion? Comment below:

No one does more to avoid paying taxes than the ultra wealthy and there's no logical, unbiased reason that this loophole shouldn't be closed.

You guys wonder why so many people on both sides of the aisle hate the bankers and ultra rich in this country? Look at these reactions. 

Rules for thee but not for me...

"I don't know how to explain to you that you should care about other people."

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Jul 28, 2022 - 9:59pm
Sequoia, what's your opinion? Comment below:

Normally I disagree with you but the carried interest loophole is egregious to pretty much everyone who doesn't work in PE. I understand why a PE person would be upset about this but it's actually a pretty crazy loophole when you think about it. Either way I don't have a horse in this race, just curious to see what happens 

Not sure this actually passes though as Sinema is against it. Don't think Republicans are going to vote for this if it's bundled into a broader package with climate change so I'm not sure people are talking about this as a foregone conclusion 

  • Partner in PE - LBOs
Jul 29, 2022 - 6:45pm

Agreed. This thread is fucking pathetic. A part of me is sad that I will be making less money if this goes through. Another part of me recognizes that I am making 8 figures when my carry comes in, I frankly do not need this much money, and it could be better allocated to other people. I am inherently greedy, just like everyone else, and that is why I was not voluntarily donating it to charity. That is why this is necessary. A big talking point on this forum is how democrats only hurt poor people and not wealthy people (???). But here ya go. This exclusively targets wealthy people. No sane person outside of PE will tell you the current loophole is fair. NOBODY. I love the outrage from college students who aren't even affected by this. If you make it to principal, you will still have far too much money to know what to do with. Don't worry.

  • Associate 1 in IB - Cov
Jul 30, 2022 - 8:01am

This is an honest question - don't you feel like you are better at allocating $$ than gvnt? Dollar for dollar Im sure your philanthropy efforts have more material impact than what the gvnt does/would be doing. I think people are upset to end up paying more in taxes when it is unlikely that anyone will benefit. 

  • VP in PE - LBOs
Jul 28, 2022 - 12:44pm

I'm a bit torn on this one, to be honest. My first reaction, as a LMM guy, was that *I* and the fund I work for create value in a way that is distinct from how megacap and even larger mid-market shops do, so my end of the market should be exempt (main character bias, obviously). I also had the knee-jerk reaction that they should be targeting public equities carry before coming after the private markets (kinda similar to first reaction on LMM vs. larger). On balance, there is no real reason for this tax treatment to exist for the vast majority of folks, as Alt-Ctr-Left says above. 

I do wonder whether more favorable levered coinvestment terms will start to come to the forefront to help solve for some of the decreased take-home. I would imagine that for future funds, GPs might ask LPs for more favorable terms so that the GP can provide higher levels low-cost leverage at higher levels than is currently market.

Someone smarter (@APAE) probably has a more nuanced take than my crayon scribbles above.

  • Teller in VC
Jul 28, 2022 - 1:15pm

??? If anything the LMM guys do more operational work than the large cap guys. Large cap is closer to stockpicking than LMM is

Jul 28, 2022 - 10:01pm
Sequoia, what's your opinion? Comment below:

What do you mean public markets carry? you mean LT capital gains tax? If that's the case this is a truly autistic take. Private equities are held primarily by the top 5% (overwhelmingly the top 1-2%) while public equities are held by even the average Joe (or avg Joe has money invested in funds / indexes for the LT). Why would you screw over the average American by increasing cap gains on public equities? Makes 0 sense

  • Assist. VP in PE - Other
Jul 28, 2022 - 10:13pm

My shop is handing out huge leverage lines to finance co-invest. Future returns on that will (hopefully) far outpace carry 

Jul 28, 2022 - 1:31pm
TimesNewMoney, what's your opinion? Comment below:

Obviously as finance guys none of us hate to see the deck stacked in our favor. But frankly, we'll be fine without it and probably don't deserve it.

My one wish is that they allowed the carried interest loophole to still apply to individuals building wealth (Below a HH net worth threshold in the millions). I still think there's a valid rationale to give tax advantages that encourage wealth building & investment from people trying to build their nest egg. 

Jul 28, 2022 - 7:54pm
WB97, what's your opinion? Comment below:
TimesNewMoney

I still think there's a valid rationale to give tax advantages that encourage wealth building & investment from people trying to build their nest egg. 

You can use the Mitt Romney Roth IRA structure for that :-)

Jul 29, 2022 - 12:13am
TimesNewMoney, what's your opinion? Comment below:

Isn't it like a $7,900/year max contribution though? Also aren't there income restrictions at like $200K to contribute?

I don't know shit about shit when it comes to personal finance / wealth management lol I feel like I should be literate on this. 

  • Associate 1 in PE - LBOs
Jul 28, 2022 - 2:23pm

Let us pray that Sinema comes through or a structuring wizard figures out a solution.

Gotta imagine that funds are already exploring options/structuring solutions.

Jul 28, 2022 - 7:35pm
IncomingIBDreject, what's your opinion? Comment below:

Do you think no Republicans will support this? Congresspeople representing primarily rural districts have more to gain here than lose by voting in favor of closing out the loophole. 

Array

Jul 29, 2022 - 2:35am
teslastem, what's your opinion? Comment below:

Sinema's bankrolled by Big Pharma, not private equity. If anybody retains the carried interest loophole, it'll be a New Jersey Democrat (like Senator Bob Menendez and Rep. Josh Gottheimer).

Jul 28, 2022 - 11:05pm
Sequoia, what's your opinion? Comment below:

Tell me one PE fund that has a 30yr history of 60% annualized returns and I'll tell you one that can charge 5 and 44

Fact is Medallion fund is the greatest fund in history given its returns & longevity. Buffet is pretty incredible for putting up high-teens annualized returns over 5+ decades, imagine putting up 4x those nbs for 3+ decades. It's ridiculous 

  • Associate 2 in PE - LBOs
Jul 28, 2022 - 5:27pm

Could you just have LPs lend the money to GPs where the coupon is tied to performance of underlying loan use (investment equity) thereby skirting around the issue in the first place?

Eg bond + rate equal to performance of bond uses as equity. You could tinker with the math so that it ends up same as before.

Sweeten the deal for holdout LPs by raising hurdle a little bit and throw them a bone on some other terms if need be.

Jul 29, 2022 - 3:36am
CompBanker, what's your opinion? Comment below:

Thinking on the spot:

One variation on this is that the LPs lend the GP the money at the time of the initial deal. The GP then invests 20% of the equity directly at the time the initial deal is done. At the time of exit, the GP is actually the one who made the initial investment and is therefore eligible for capital gain. Some true-up mechanism would need to be exist also… but I think this would work if the GP were comfortable with the downside of actually losing money in the event the investments underperformed. The LPs could always forgive the loan at which point the GP would be on the hook for the subsequent tax consequences but it would lessen the blow substantially.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/

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  • Works at Goldman Sachs
Jul 28, 2022 - 8:36pm

Can structuring gurus opine what if you tie it to the gp coinvest. Gp gets a different class of shares with 0 value at entry but accrete in value as moic steps up (synthetically simulating 80/20). Since it's part of the original investment for which you took capital risk it's cap gains? 
 

edit: Maybe it's like a SAR and taxed at ordinary income? I'm sure ppl can figure this out fuck taxes 

  • Associate 2 in IB-M&A
Jul 29, 2022 - 9:01pm

The problem is that whatever cash payout you get from whatever structure you manufacture, is going to be taxed as ordinary income. 

  • Works at Goldman Sachs
Jul 29, 2022 - 11:29pm

The problem is that whatever cash payout you get from whatever structure you manufacture, is going to be taxed as ordinary income. 

And why is that? You can definitely cook up something just need to tie it to the initial principal risk in the gp coinvest. I.e. gp coinvest aren't pari passu then it's no longer carry just different class of shares but only pays out if capital gain and does have capital at risk 

Jul 29, 2022 - 3:38am
anglosaxonchad, what's your opinion? Comment below:

Ridiculous. Carried interest is accompanied by nearly as much risk as if it came from your own capital in a fund. If equity-based compensation isn't taxed as income, neither should carry (which is far more illiquid and volatile).

Jul 29, 2022 - 3:40am
GTV, what's your opinion? Comment below:

How do you figure that carry has the same risk as your own capital in a fund?  There's no way you can have principal loss with carry but you can with your own capital in a fund?

Jul 29, 2022 - 12:52pm
curiousgeorge79, what's your opinion? Comment below:

Equity comp is the same as is 401k matching. If PE hurts, maybe equity comp should be taxed at normal rates as well as 401k match (when vested). If Wall Street can't get a freebie, Main Street, or Silicon Valley shouldn't either.

  • Principal in RE - Comm
Jul 29, 2022 - 12:56pm

I don't disagree that equity-based comp should be similar to carry.

But by your logic from your first point (carried interest comes with same type of capital risk as in you might not get it), then you would say bonuses should also be taxed at a lower rate. If you take a job with a 200k salary but target 500k bonus, that 500k could be 0, 500, 750, etc.

Jul 29, 2022 - 9:48am
unknownmonkey37, what's your opinion? Comment below:

The only way I'd be ok with this change is if there was a corresponding broad base cut in income tax for all Americans.

Any tax change that justifies additional government spending of any kind deserves to go down the drain. I could go outside and burn my money myself instead of the government doing it. This bill is going to help no one.

Jul 29, 2022 - 12:46pm
curiousgeorge79, what's your opinion? Comment below:

Very strange to tax money that is earned from actively managing investments as ordinary income... NYC NeverTrumpers get what they voted for though. Looks like Wall Street doesn't have many friends left after going woke + ESG + voting Democrats in.

  • Principal in RE - Comm
Jul 29, 2022 - 12:57pm

This narrative sucks. Trump capped the SALT deduction. Very painful for high earning white collar professionals in NYC

  • Associate 1 in IB - Cov
Jul 29, 2022 - 5:20pm

I know this isn't your point but it is worth putting out into the world. SALT deserved to be done away with because it gives states piss poor concern and responsibility for their state's residents from a financial perspective and softens the blow in the minds of their residents about taxes.  Other states seem to get along just fine with zero or half of what NY/CA taxes are. Not that things will get any better but why should other states' residents need to kick up in full to fed gvnt while liberal states burn the money and send the federal gvnt what is left (to also burn on fire)? Blue states deserve very high taxes for their voting patterns. 

  • Principal in RE - Comm
Jul 29, 2022 - 1:51pm

The capital gain on an investment is the same whether one individual owns the asset or it's owned through a partnership that allows a disproportionate split of the profits. The same amount capital is contributed, but under this proposal, the government will take a larger cut of the profits simply because the gain is being split disproportionately to how much capital each partner contributed. For a $100 capital gain on a $100 capital investment, a 100% owner of that entity pays $20 in tax. Under an 80/20 scenario, ignoring a pref, where the LP puts up all the capital, a $100 capital gain on a $100 capital investment results in the LP paying $16 in tax and the GP paying $8 in tax for total tax of $24. Does the gain deserve an extra $4 in tax just because of the partnership structure? If the carried interest is being viewed as "income" then it's someone else's "expense" - the LP's should be able to deduct that, thereby allowing for a more aggressive structure than 80/20 with the hopes that each party's after-tax outcome will be similar as it is today and Johnny Public is happy that alternative investment managers are "paying their fair share."

I do fairly straight forward real estate syndications, so structuring PE funds isn't my background, and for all I know, PE funds may already do this, but thinking out loud here... couldn't the carried interest be avoided by restructuring the fund/deal into preferred equity and common equity? So take for example a deal where LP/GP split is 80/20 after an 8% pref and with no GP co-invest to keep it simple. Total capital needed is $100. LP contributes $100 as preferred equity paying 8% preferred dividend. Common equity ownership is 80% LP, 20% GP with LP contributing $0.80 and GP contributing $0.20 to establish common equity capital accounts. I don't see how this is any different than a public company issuing preferred shares and common shares. The common doesn't have to pay a higher tax rate on capital gains due to the investment being profitable enough to pay off any debt, all the preferred shares and then still have money left over for the common stock holders. Although public companies also pay ordinary income taxes on long term capital gains, so maybe not the best example. If not preferred equity, maybe some sort of junior debt issued? There has to be a way to structure around this... 

  • Principal in RE - Comm
Jul 29, 2022 - 3:53pm

Your top portion is a really good argument (basically taxing cap gains above a threshold profit return at a higher rate), at the point that it reaches employees. 

Obviously you could also hit your carry through super strong cash-on-cash, which is separate from cap gains

  • Analyst 1 in IB-M&A
Jul 29, 2022 - 2:39pm

Happy to be in Europe !!!

  • Prospect in IB - Cov
Aug 4, 2022 - 1:20pm

Another example of our horrifically corrupt government, but looks like PE lobbyists will win this one again. Sinema arguing to keep it out of bill

  • Prospect in IB - Cov
Aug 10, 2022 - 10:30pm

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Aug 7, 2022 - 11:11am
Aine, what's your opinion? Comment below:

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