Certain hedge fund managers, real estate investors and venture capitalists earn much of their pay in the form of carried interest. Leon Cooperman, a prominent hedge fund manager, recently called the special treatment “ridiculous.” The White House, which has long expressed support for raising the tax rate on these investment managers and Democratic lawmakers have introduced tax-reform legislation amid a populist backlash against the extraordinary wealth being created on Wall Street. The effort died in Congress after an aggressive lobbying effort from private equity and hedge fund firms.
The bulk of private equity executives’ compensation comes in the form of carried interest, which is the 20 percent cut of a fund’s profits they keep for themselves. If a private equity firm sells a company for a $1 billion profit, the firm’s executives are entitled to keep $200 million as a performance fee. (Mr. Romney’s former firm, Bain Capital, because of its superior investment record, keeps 30 percent of the profits in many of its funds.)