Did Investors Know PE Firms Inflated Fees?

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April 8 (Bloomberg) -- Private Equity Growth Capital Council CEO Steve Judge discusses the SEC probes of private equity firms on Bloomberg Television's “Market Makers.” (Source: Bloomberg)

Hook question like how worried are these pe guys and women to star this issue has been discussed for seven years.

Carried interest has received a lot of attention.

There's a new approach german camp has put out -- republican dave camp put carried interest in his most recent tax reform proposal.

A proposal a lot of people are taking very seriously.

I don't think specifically of a carried interest provision.

First, carried interest and other mineral extraction.

There is generally no support for that.

Carried interest is carried interest no matter what kind of partnership.

The second proposal is it recharacterized as carried interest.

It has long been treated as the ownership share of a capital asset.

The capital asset receives capital gains treatment.

It has been tradition for 100 years to treat it that way.

Are you saying people who are oversimplifying this -- steve schwarzman made 375 million dollars in only 350 grand was taxed as ordinary income.

Are we looking at it in the wrong way?

I don't know his compensation but it's too easy to oversimplify this.

The way the funds flow back and forth is very complicated.

Private equity firms and funds own shares of goods and when they make a profit home it's treated as a capital gains.

I think it should continue that way.

We have put this question before -- david rubenstein said we are willing to give up the preferential treatment as long as is heart of rotter tax reform.

Now it's part of broader tax reform, why is in the industry getting behind it?

A lot of tax reform is moving this year.

Now you are hairsplitting.

I'm not hairsplitting.

It's very important.

If you're going to talk about an overall tax deal, there's a million overall pieces.

Tax reform is -- accounts for the entire economy.

Nobody says we want to carry it differently.

Break it down for us in a different way.

If we were to say eric schmidt of google gets $100 million in steve schwarzman gets $100 million, is that income taxed in a different way?

It's from the beginning, it should be treated the same.

It's the initial investment in that company, same thing with all the investors in the fund.

You know the argument much better than we do, but as i understand it -- i would disagree.

It's not that there's nobody who says the tax treatment on carried interest shouldn't be different between real estate and private equity.

There are lots of people who say the tax treatment in the real estate industry or boiling gas industry should be different from venture capital or private equity.

They say because the tax provisions around carried interest were developed or at least instituted in order to create a stimulus for risk capital.

The argument made is private equity carried interest -- there are people who say it should be treated differently.

I was speaking of the generally accepted precept in washington and the industry.

I don't think there's any justification for treating mineral extraction and oil and gas differently from private equity.

The structures are the same, the flow of funds are essentially the same stop each is little different, carried interest doesn't have a special provision and pe does not have a special provision.

It is a capital gain.

You can't say to me that investing -- putting money at risk in drilling and oil well is the same thing as buying a steady cash flow company that you can flip seven years later.

You don't know it's going to be a steady cash flow company.

I don't know how you can call a seven-year holding time a flip.

But you don't know that you can sell it in seven years.

Lacks the point i'm trying to make is there's a difference.

It's a different thing you bought but not a different philosophy or fund structure.

I agree.

Is the same philosophy.

Really western mark the risk you take in drilling and oil well where you could come up rise the same as making a private equity investment?

You may not be able to increase the value.

The whole value proposition is the company they buy is worth far more when they sell it seven years later than when they bought it.

We just assume -- it has to be far more to compete with other asset class should -- private equity classes.

We are assuming these companies are going to turn into gold.

Maybe we are just looking at the good private equity firms making good investments.

Rex private equity return $120 billion its investors.

$120 billion and they invested 400 lien dollars in united states companies.

If the best-performing asset classes for pension funds -- hold on -- we find out the sec is investigating maybe these private equity firms are misleading investors who are pension fund endowments.

What do you make of this?

I saw your report and its the best report i've seen on it.

It is hard to comment but we can talk about fees in general.

What is striking about private equity is the alignment between investors and the portfolio companies -- that alignment of interests is -- your interest may be the same, just as the hedge fund manager wants investors to do well, but he still wants to take two and 20 out.

But that's all laid out in the limited partnership agreement in private equity.

The responsibilities, rights, obligations, flow of funds is all laid out, highly negotiated by very sophisticated investors by each side, armed by lawyers who go over this.

That is all laid out there, so there should be no surprise as to what's in the limited partnership agreement and what funds can be charged and what fees can be charged.

There should be no surprise so long as the funds have been wholly transparent and the implicit allegation and what we understand is that they haven't been.

That is implied.

We don't know that all stop them to, it doesn't make any sense why a business would want to alienate its investors over time.

If you can quietly take little bits of extra money, we've seen industries do that for centuries.

You have a contract that lays out exactly what you can and cannot do and conflict resolution provisions and advisory boards from everyone who serves -- and you think nobody takes a little extra love out when they cap?

I don't know of that happening and i haven't seen the report, and i don't think it

This text has been automatically generated. It may not be 100% accurate.


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