The sun is shining, the Blackstone IPO is looking like an aftermarket dud and my summer sabbatical begins in t-minus six hours. In other words, it’s time for Friday Feedback.
I have received hundreds of emails on the carried interest issue over the past two weeks, and am only including a few here. The rest can continue to be found elsewhere on the site, both in front of and behind the firewall (premium subs required for peHUB content more than five days old. Get one here).
VC Walter: “Tax policy is being discussed as if it was discovered on a stone tablet centuries ago and has remained unchanged. Tax policy has always been used to promote public policy such as saving, investment and farming. The treatment of carried interest is no different and this is not simply a debate about capital gains vs. ordinary income. Venture capital has done great things for the country over the last 40 years and it has done so by attracting some of the best minds in the world who are willing to take big risks. Tinker with the tax treatment that has been used over that period and things will change – that is simple cause and effect. If the elected officials are unhappy with the industry that has brought us Intel, Amgen, Apple, Genentech, Google and hundreds of thousands of jobs, then tinker away — but do not do so lightly.”
LP Thomas: “I know they say, if founders equity blah, blah, blah… But so what? If I wasn’t fat and ugly, I would be pretty good looking too. I don’t see why the two issues should be linked. If some GP wants to go out and start a company than he should get cap gains treatment on his gains, otherwise its ordinary income, just like every other working stiff. These guys are sounding like Leona Helmsley who said that only the little people pay taxes, before she was carted off to jail for tax evasion… This is no different than the portfolio manager of the Fidelity Magellan Fund who gets a performance bonus when his fund outperforms the S&P 500. Or an LP like me who gets a performance bonus based on how well my portfolio does relative to the benchmark.”
Greg: I run a very small later-stage fund that invests in growth and buyouts. As the length of time of exit in this segment has quadrupled in the last 4-5 years, and LPs successfully inserted preferred returns in most partnership agreements, I will not receive my carried interest until the fund is probably more than 7 years old (and possibly as long as 9 or 10). What is not ‘long term’ capital gain about that? Don’t penalize us all for the few that hit the headlines.”
Chris: “From the way some of these VCs and private equity guys are talking, you’d think they’re entitled to be wealthy just because they decided to become VCs and private equity guys. Don’t complain to me, the taxpayer, about how hard it is for you to earn significant carry. Maybe that just means you’re not that good at what you do.”
*** A few replies to my conversation with Rep. Sandy Levin. Drew: “I would have laughed out loud over your story relating to the overall ignorance of Senator [sic] Levin on this question if I didn’t take the future of my country so seriously. If my respect for government weren’t already at zero, I would have also been very surprised that a senator could have so little knowledge of his own legislation. If I were on a conference call and management said they would have to get back to me on an issue this important, I would have to ‘pass’ due to poor/unsophisticated management. I hope voters will ‘pass’ on this management in 2008.” (Quick note Drew, it’s Representative Levin, not Senator Levin – although they do both come from Michigan.)
VC George: “Levin again shows that the legislators are disconnected from reality and that they do not know how businesses or investing really work. One of the primary reasons for the Limited Partner, LLC structure is to insulate the passive investors (LPs) from the liabilities that come from high risk investing. We, the GPs who do all of the work, assume some of that liability and since we do all of the work for these passive investors, receive 20% of the gains (after return of 100% of principal) in return for this and other considerations. Given that it takes 5-7 years for realizations to develop in the early stage market, GP compensation here is clearly not earned currently, which was the original intent of this tax treatment. Whatever happens, net after tax, the LP’s will have to pay this 20% rate. If Levin wants to look at the tax law, he may want to see why he proposing a change that will in the short run hurt the tax exempt pension funds that are the bulk of the investors in these vehicles.”
*** Finally, Chris asks the day’s most pressing question: “How are you coping with Danny Ainge’s latest disastrous trade? If basketball was like private equity, neither Pagliuca nor Grousbeck would be getting any carry for a long, long time.”
To preface, I’m no Danny Ainge fan, and the Jordan Bulls wouldn’t have even made the NBA Finals with Doc Rivers as head coach. But… I actually like this deal. We add a perennial All-Star (albeit an aging one), keep our most promising young players (Jefferson, Green & Rondo), hold on to Mr. Trade Chip (Ratliff) and keep Pierce content. Oh, and the young guys might actually get to experience a few wins, which should boost confidence. Plus, we drafted a fat basketball player. Do you know how rare that is? He might have a bigger built-in following than Yi Jianlian…