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7. Private equity controversies True or False: Since carried interest paid to general partners (GPs) is counted as a capital gain GPs usually end up paying a lower effective tax rate than most Americans who earn an average income. O True O False Suppose Dmitri, a private equity general partner, purchases all the shares of a distressed portfolio firm, but has no insights into how to improve the profitability of the portfolio company. Also suppose Caroline, a private equity general partner, purchases all the shares of a distressed portfolio firm. Caroline has extensive experience in the industry of the portfolio company, and knows how to increase its profitability. Use the following table to categorize each GP as either dumb money or smart money. General Partner Smart Money Dumb Money Dmitri O Caroline O O Suppose Caroline uses leverage to purchase a portfolio firm. Caroline then assigns the debt to the portfolio firm, making the interest on the debt tax deductible. Caroline is taking advantage of the corporate debt tax shield