I recall a conversation with Alok on this topic, on the day the budget was presented. The Economic Times has an article today that outlines the issue, but presents no clear resolution one way or another. Would some of the knowledgable folks here comment?
The worst isn’t over for venture capital funds (VCFs). The million-dollar question before funds now is the rate at which their earnings will be taxed. Will it be 10% that stock investors pay on “capital gains” or, will the IT assessing officer use his discretion and treat the earnings as “business income” and slap a 30% tax?
There is no straight answer to this: while one may argue that VCFs buy stocks with the clear purpose to invest and hold on for a few years, it is also perceived that trusts are set up for the “business of investment” and hence what they earn is business income.
More so, since VCFs invest in unlisted stocks, where long-term gains are also taxed. A 30% tax could deal a body blow to VCFs, making them significantly less attractive as invesment vehicles. The tricky issue has cropped up even as funds are finding it difficult to come to terms with the new proposal that brings most VCFs under the tax net.
- Mary Meeker’s 2014 Internet Trends report - May 28, 2014
- Andreessen-Horowitz raises $1.5B for its new fund - February 1, 2012
- WestBridge launches India “evergreen” fund - November 15, 2011
Another quote from: http://en.wikipedia.org/wiki/Hedge_funds
Like hedge funds, mutual funds are pools of investment capital. However, the two structures have several differences, including:
* Mutual funds are regulated by the SEC, while hedge funds may not be
* A hedge fund investor must be an accredited investor with certain exceptions (employees, etc.)
* Mutual funds must price and be liquid on a daily basis
The last bullet is the biggest differentiating factor. Mutual funds can only invest in securities that are liquid & price daily, so providing accurate NAVs and exit routes. Hedge funds, on the other hand, can (and often do) invest in securities (derivatives, swaps etc) that do NOT have a liquid market and can take long to unwind.
So mutual funds are not hedge funds and are not part of Alternative Investments.
http://en.wikipedia.org/wiki/Alternative_investments
“The alternative investment class includes real estate, private equity, and hedge funds.”
Hedge funds are not the same as mutual funds (Alliance Capital). For that read:
http://en.wikipedia.org/wiki/Hedge_funds
So as per Wikipedia, VC is a sub-segment of PE, PE does NOT include public equities, alternative investments include PE & hedge funds, and hedge funds are different than mutual funds (of which Alliance Capital is an example). Also, PE does not refer to only financial (passive) investors, but somebody who adds value to the company by way of influencing management decisions.
Amazing…if you so insist, go read this.
http://en.wikipedia.org/wiki/Private_equity
“More accurately, private equity refers to the manner in which the funds have been raised, namely on the private markets, as opposed to the public markets.”
“Categories of private equity investment include leveraged buyout, venture capital, growth capital, angel investing, mezzanine capital and others. Private equity funds typically control management of the companies in which they invest, and often bring in new management teams that focus on making the company more valuable.”
“As they are not listed on an exchange, a private equity firm owning such securities must find a buyer in the absence of a traditional marketplace such as a stock exchange.” – this is the BIGGEST difference (not regulation) between private equity & public equity. You can sell your public investment tomorrow because there is a market for it (the stock exchange) and that market sets the price, but for private equity, you need to go out and find a buyer.
What is regulation to do with definition of `Alternative Investments’ which you have grossly misconstrued ?
I think that’s too basic and Wikipedia if anything is written by authors who are credible enough. When arguments are all on a weak base, it’s better to admit and quit instead of trashing KPCB (earlier ) and Wikipedia now.
best.
Adding fuel to the fire:
http://www.calpers.ca.gov/index.jsp?bc=/investments/assets/equities/aim/programoverview.xml
says:
“Private equity is the investment in companies that do not trade on a quoted market. ”
That pretty much rules out the wikipedia definition, and I think Ash was talking about Calpers style rather than anything else.
In fact further down the page you’ll see where Calpers classifies its VC investments as part of their private equity portfolio. At least with Calpers Ashish is bang on – VC is a subset of their PE.
To drive home the point they have a “Private Equity Industry Dictionary”
http://www.calpers.ca.gov/index.jsp?bc=/investments/assets/equities/aim/pe-glossary.xml
Venture Capital – Venture capital is, strictly speaking, a subset of private equity and refers to equity investments made for the launch, early development, or expansion of a business.