An interesting subplot to the carried interest tax debate has been how venture capitalists keep trying to disassociate themselves from buyout pros. peHUB 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.
The struggle reached a new level yesterday, when the National Venture Capital Association issued a variety of comments designed to distinguish VC from LBO. For example, NVCA president Mark Heesen said: “The venture capital industry isn’t in the ‘buy it and flip it’ business. We invest for the long haul, helping to create exciting new industries and companies that revitalize communities.”
The NVCA also said that there are “distinct characteristics of venture capital that no other industry can claim.” Gee, I wonder what other “industry” it might be referring to… You can download the entire release, which came out as the NVCA board met in Washington.
NVCA spokeswoman Emily Mendell referred to the statements as an effort to “raise our voice to new levels.” She says that VCs want Congress to examine each industry independently, rather than lumping VC in with buyouts, hedge, real estate, timber, oil and gas, etc.
What this leads to is a giant question: Could Congress pass a law that changes carried interest tax treatment for LBO funds, but not for VC funds? I doubt it. NVCA is correct that VC and buyout funds have different investment strategies and outcomes, but they nonetheless share very similar structures (which is why they both utilize the exact same tax loophole).
What would “separate” language look like? Would it simply be a matter of company control? If so, VC firms could be classified as LBO firms if they do a Series A deal in which they receive over a 50% stake in the company. Or maybe they get around it by making it a Series A consortium, with each individual fund taking a minority position. Ok, but how is that different from Blackstone and KKR clubbing up for a deal in which each takes a 45% interest (with management holding the remainder)?
Mendell acknowledged the difficulty in crafting such language, which is perhaps why NVCA has not yet done so. However, Mendell also said that NVCA would consider working on such legislation with lawmakers, if asked. That request will probably come soon – so it’s time for some creative minds to get busy. If you’ve got any ideas on how to split this baby, let me know…