Private Equity Management Fee Conversions

Abstract

Private equity managers regularly convert a portion of their 2 percent annual management fees into additional carried interest. They do this primarily to convert the tax character of the resulting income. This special report explains the economics behind management fee conversions, describes their mechanics, and analyzes the arguments that could be made by the IRS to disallow their intended tax results. The report ultimately concludes that the IRS can make quite strong arguments under current law to deny managers the tax benefits they seek in converting fees.

Keywords: fee waivers, fee waiver, fee conversion, fee conversions, private equity, private equity management fees, private equity management fee waiver

JEL Classification: K34