Comments on: Fumbling the Carried Interest Debate Again: Random Shots http://www.hedgeworld.com/blog/?p=438 A look behind the hedge fund curtain Wed, 22 May 2013 07:27:17 +0000 http://wordpress.org/?v=2.6 By: WD http://www.hedgeworld.com/blog/?p=438#comment-2967 WD Tue, 19 Jan 2010 23:38:38 +0000 http://www.hedgeworld.com/blog/?p=438#comment-2967 There is a significant nuance to this of which many seem unaware. In the non-hedge fund context, many of the managers/principles entitled to receive carried interest have also personally guaranteed the loan. This is especially true in commercial real estate deals. Initial loan amount will often exceed equity by a factor of 3 to 1, and the manager has his entire net worth on the line. I agree in principle with taxing carried interest receipts (in excess of investment) as ordinary income, but the guarantors risk should be given some credit. Thinking about this, my modest proposal would be credit the guarantor/manager for an investment valued at the lesser of (1) loan amount guaranteed and (2) net worth of guarantor at risk (taking into account assets unreachable as a matter of law) minus total other debt guaranteed by that guarantor. Does anyone else understand what I'm saying here? I certainly haven't seen this argument in print. There is a significant nuance to this of which many seem unaware. In the non-hedge fund context, many of the managers/principles entitled to receive carried interest have also personally guaranteed the loan. This is especially true in commercial real estate deals. Initial loan amount will often exceed equity by a factor of 3 to 1, and the manager has his entire net worth on the line.

I agree in principle with taxing carried interest receipts (in excess of investment) as ordinary income, but the guarantors risk should be given some credit. Thinking about this, my modest proposal would be credit the guarantor/manager for an investment valued at the lesser of (1) loan amount guaranteed and (2) net worth of guarantor at risk (taking into account assets unreachable as a matter of law) minus total other debt guaranteed by that guarantor.

Does anyone else understand what I’m saying here? I certainly haven’t seen this argument in print.

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