Private equity and venture capitals firms appear to have dodged one bullet this past week, while being winged by another.
The final versions of the House and Senate financial reform bills both exempt private equity and venture capital firms from having to register with the Securities and Exchange Commission. This will help them avoid the more intense scrutiny that their hedge fund brethren will have to face now, by registering. Instead, both bills simply call for the SEC to decide what type of records it would like PE firms to file.
On the other hand, Senator Max Baucus, chairman of the Senate Finance Committee, and Representative Sander Levin, chairman of the House Ways and Means Committee, have put forward a bill that will increase taxes on the carried interest paid to executives at private equity firms, hedge funds and investment partnerships.
Under the traditional “2 and 20” private equity compensation scheme for PE funds, the 2 percent management fee is usually taxed as income. While the managers’ share of profits, known as carried interest, has in the past been taxed at a lower capital-gains rate, currently 15 percent but earmarked to rise to 20 percent in 2011, according to Bloomberg.
But under the new bill, carried interest for the next 2 years would be taxed at a 50/50 split between ordinary income and capital gains. This split would rise to 75/25 ordinary income to capital gains, after 2 years. That would amount to a 35 percent tax rate.
According to the New York Times’ Dealbook, the industry is already pushing back. Douglas Lowenstein, president of the Private Equity Council, is quoted as saying, ” This punitive, 157 percent tax hike on growth investment by real estate, venture, private equity and other firms will hurt those companies that are most desperately in need of capital to sustain or create jobs and drive growth.”
What do you think? Are increased taxes on private equity and venture capital firms inevitable, in this more aggressive regulatory climate? Add your comments below.
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