President Barack Obama's budget proposal to change the tax treatment of carried interest, the latest in a string of alternative investment initiatives in Washington, is bringing predictions of dire consequences from industry sources.
But investors aren't so sure.
While many industry players and observers don't expect institutions to stop investing in alternatives any time soon, one private equity industry group sees a darker picture.
The Private Equity Growth Capital Council, Washington, claims that a tax hike would have a negative effect on private equity firms and their ability to produce high returns. That, in turn, would cause investors to review their investments.
“While it comes as no surprise that the president has included a carried interest tax hike in his budget proposal, the fact is that raising taxes on private equity investments would discourage the risk-taking required to start, grow and save companies,” council officials said in a statement.
Ken Spain, vice president of public affairs and communications, did not return phone calls seeking further comment.
Investors have a different perspective. Officials at the California State Teachers' Retirement System, West Sacramento, have not made any changes in its alternative investment program in response to the initiatives in Washington, said Ricardo Duran, spokesman for the $144.8 billion system. But he added: “We are keeping our eye on it.”
The president's proposal for the fiscal year 2013 budget, as well as a bill introduced last week by Rep. Sander Levin, D-Mich., ranking member of the House Ways and Means Committee, are just the latest efforts to increase the tax paid by general partners in private equity and other alternative investment firms. If approved, such a proposal would eliminate the lower carried-interest tax rate they now pay, and instead apply ordinary income tax rates.
But investment consultants say the impact of the carried interest debate has been overstated.
“The tax treatment of the carried interest issue is overblown on a fiscal basis, as it will not make a dent in the federal deficit, and on a private equity basis, as it will not materially impact private equity behavior or performance,” said Thomas Lynch, senior managing director in the New York office of alternative investments consultant Cliffwater LLC.
Jeffrey MacLean, CEO of Seattle-based consulting firm Wurts & Associates, agrees about investor behavior. “I don't see that affecting investors' appetite at this point. It's something that may happen in the tax law and there are so many things that are involved in the decision to allocate to private equity.”