carriedinterest

Carried interest, or carry, is a form of performance-based compensation commonly used in private equity, venture capital, and related investment funds. It represents a share of the fund’s profits allocated to the fund’s managers, typically the general partners, as a reward for successful investing. A common structure awards about 20% of profits to the managers after the limited partners have received their invested capital back and, in many cases, a specified preferred return or hurdle rate. The exact terms vary by fund and jurisdiction.

The mechanics of carried interest rely on a distribution waterfall. Initially, all capital contributed by limited partners is returned, and the preferred return may be paid to LPs. Only after these conditions are met do the general partners receive their carry. Some funds include a catch-up provision that allows GPs to receive a larger share of profits once LPs have achieved their hurdle, before the LPs’ share tapers off. Carry is typically realized only when investments are exited and profits are distributed, aligning manager incentives with long-term fund performance.

Tax treatment of carried interest varies by jurisdiction and over time. In several countries, carry is taxed as capital gains rather than ordinary income, potentially reducing tax liability for managers. Critics argue this creates a tax bias in favor of fund managers, while proponents contend it reflects the long-horizon, risk-bearing nature of the work. Reform proposals have periodically sought to change how carried interest is taxed or structured.

Carried interest is a defining feature of many fund compensation models but remains a subject of debate regarding compensation fairness, transparency, and regulatory treatment.