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October 4, 2010 / marios

Private equity funds

I will let you into a little secret that I found about recently. A private equity fund is an investment vehicle set up as a limited partnership between an investment management company and cash-rich institutional investors (i.e., universities, endowments, pension plans, insurance companies, high net worth individuals). The fund managers collect and then invest the capital and as a payment for their services receive a management fee (1-2% of the fund’s capital like in a mutual fund) and what is called a carried interest.

The carried interest is a payment (essentially income for the fund managers) that can amount for up to 20% of the gains of the fund’s investments, over the lifetime of the fund. Clearly, the carried interest can, and usually does, reach a very large amount of money. Here is the little secret: fund managers are taxed on the carried interest not as ordinary income (35% rate) but as capital gains (15% rate as of 2003).

There you have yet another tax loophole for the rich! Don’t you feel even more outraged about the bailout of the financial industry now?

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