As many of you may have followed, there is a battle royal brewing around the taxation of carry (the 20% of the upside GP’s receive). Historically, this has been treated as capital gains (usually long-term) so enjoys a low tax rate. With the excesses of the hedge fund & buyout managers, Congress has begun evaluating different ways to tax carry as current compensation just as salary is. What preceded this is that Blackstone’s CEO, Steve Schwatzman, hosted a very high profile, $2m birthday bash for himself (like the Romans would…) and then followed this up by taking Blackstone public (thereby exposing the significant carry & fees they earned). Now, carry charged by all types of investment managers (VC, Buyout, Hedge, Real Estate, etc) is under attack and the various asset groups are trying to extricate themselves from snowball. Daniel Primack published an interesting piece today in PE Week that lays out some of the resulting behavior. As a VC, I’ll enjoy being in the good guy camp for short interim period…
An interesting subplot to the carried interest tax debate has been how venture capitalists keep trying to disassociate themselves from buyout pros. PE Week Wire considers both groups to be part of the private equity landscape (I take “private equity” literally), but most VCs would sleep better is Kleiner Perkins was never again mentioned in the same breath as Blackstone or KKR. Buyout pros, on the other hand, keep clinging to VCs like elderly straphangers on a bumpy subway line.
Why the fissure? Because VCs believe they are forces for good and buyout pros are forces for bad. Or at least they believe Congress and the general public believes that – and they are worried about their halos being dirtied. For buyout pros, it’s the same idea in reverse – with LBO mavens hoping to launder their reputations through the VC wash…"