Carried Interest

Obama The Liar-in-ChiefObama and his coterie in the White House have finally submitted their initial draft of the American Jobs Act, though it doesn’t yet appear to have been formally introduced to Congress.

By any measure this is a late effort but, as usual for the Obama Regime, it’s not a better late than never situation – except possibly in the context of Obama keeping and his handlers keeping his own job for a few more years.

It’s largely (70% of it) the buying of votes and retreaded Liberal wealth redistribution ideas.

Simply put, it’s $447 billion of up front spending allocations to be supposedly paid for over the course of a decade by tax increases, including taxing the carried interest, or profits-based compensation, of private equity managers, real estate investors, and venture capitalists as ordinary income, instead of more lightly taxed capital gains.

This is not going to spur business or employment. It will likely have quite the opposite effect due to what Carried Interest is and how it works.

Carried Interest:

A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund’s performance.

Traditionally, the amount of carried interest comes out to around 20-25% of the fund’s annual profit. While all funds tend to have a small management fee, the management fee is meant to only cover the costs of managing the fund, with the exception of compensating the fund manager.

Carried interest is meant to serve as the primary source of income for the general partner. However, the general partner must ensure that all the initial capital that the limited partners contribute is returned along with some previously agreed upon rate of return.

What happens is that people running the fund, called the General Partners charge the rest of the funds’ investors, the Limited Partners a combination of maintenance fees and profit sharing. This is usually referred to as “2/20,” signifying fees of 2% of the funds’ assets and 20% of the funds’ returns above an agreed upon amount known as the “hurdle rate.” That 20% is what is the Carried Interest, meaning the General Partners’ carried or ongoing financial involvement in the fund.

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