‘Quirk’ is a basic tenet of capitalism

Financial Times

By Mr Steve Judge.

Sir, Daniel Schäfer’s characterisation of the long-standing tax treatment of carried interest as a “scheme” or “quirk” is not only unfair but unfounded, and belies a basic tenet of capitalism that says those who take risks to invest should be rewarded (“Questions over a quirk”, Analysis, March 8).

Private equity firms partner with investors to buy companies that are poised for growth or in need of repair. They invest capital and expertise to expand the business over time. Their partnership interest – called a carried interest – is quite clearly an equity stake in these operating companies. Any other investor with such a stake is entitled to capital gains treatment on the profits they realise on the sale of those companies after a holding period of one year.

Private equity partners risk their own capital alongside their investors. But they also carry the substantial risk that these investments will not pan out, or that they will fail to achieve the stated return targets for their investors. In those cases, PE partners are required to return some or all of their carried interest.

While Mr Schäfer seems unsure whether taxing carried interest at a higher rate would have real harmful consequences, it is clear that increasing the costs of private equity investments would only reduce incentives to invest in companies in need of capital. With roughly 8.1m workers across the globe employed by 14,000 US-based private equity-backed companies, we think the harmful consequences are clear.

Steve Judge, President and Chief Executive, The Private Equity Growth Capital Council, Washington, DC, US