Carried Interest Consequence: Smaller Funds, More "Skin in the Game"
Last week I discussed possible consequences of changing the tax treatment of carried interest, in terms of investor behavior. Things like new fund structures, increased exit activity before the tax hike kicks in, etc. Here's one more, particularly for venture capital firms: Smaller fund sizes with larger general partner contributions. How come? The main reason is that ROI on general partner contributions will continued to be taxed as capital gains, as GPs in this case really are acting as LPs. The higher the percentage of GP carry, the lower the percentage of returns taxed as ordinary income. The downside here is that it could be harder for younger partners to earn significant carry (because they don't have as much existing bank), but it could be partially countered by reallocating fee streams.
