The Homeowner/Carried Interest Analogy

Gerry Langeler, a managing director of OVP Venture Partners, has garnered attention this week for a NYT op-ed and CNBC appearance arguing against proposed changes to carried interest tax law. The heart of his argument is the following analogy:

“We in the industry invest a small percentage of the total dollars in our partnerships, like the house purchase, with our limited partners investing the rest. Our investments are locked up for prolonged periods of time, often five to 10 years before we see any return. There is a real, material risk of loss of capital. In fact, many venture funds in the bubble lost money, including partners’ capital. Like the house situation, our downside loss potential is ‘fixed’ by what we invested, while our upside is unbounded.”

In short: GP=Homeowner and LP=Bank.

I emailed – and tweeted – my primary objection to this comparison: Since when have mortgage lenders paid homeowners an annual fee?

Langeler replied via email. Here’s the most relevant portion:

“If I go to the lender and get them to agree to lower their interest rate in exchange for a piece of the upside on the house, that does not change the capital gains treatment. If I get them to eliminate the interest rate in return for a larger piece of the upside, my piece of the upside is still a capital gain. If I get them to pay me regular income to manage the house (that I essentially borrow from them, but have to pay back) but give them an even larger piece of the upside, it’s still a long term capital gain for both of us.”

I’ve got some more thoughts on this, but would like to hear yours first…