What is carried interest in private equity?

Question

Accepted Answer

Carry refers to the share of profits that private equity fund managers receive after meeting certain performance benchmarks.

Carry is a form of incentive compensation for private equity fund managers.
It is typically a percentage of the profits earned by the fund after a certain hurdle rate has been met.
For example, if the hurdle rate is 8% and the fund earns a return of 15%, the carry would be calculated on the 7% excess return.
Carry is usually split between the general partner (GP) and limited partners (LPs) according to a pre-determined formula.
The GP typically receives 20% of the carry, while the remaining 80% is distributed among the LPs.
Carry is an important component of private equity compensation and can be a significant source of income for fund managers.

Accepted Answer

Carried interest is the share of a fund’s net profits allocated to the General Partner.

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