Carried Interest
IntermediateCarried interest is the share of an investment fund's profits paid to its managers, typically around 20% of profits above a minimum return, as a reward for performance.
Carried interest, often called carry, is the main way private equity, venture capital and hedge fund managers can earn large rewards. It aligns managers' interests with investors', since managers only receive carry if the fund generates profits.
Most private equity funds include a hurdle rate, often around 8% a year, which investors must receive before managers earn carry. Some arrangements include a catch-up, allowing managers to receive a larger share of profits for a period after the hurdle is met, until they reach their full share.
For example, a fund raises 500 million and eventually returns 900 million to its investors, a profit of 400 million. If the managers' carried interest is 20%, and ignoring the hurdle rate for simplicity, they receive 80 million.
The tax treatment of carried interest has been politically controversial in several countries. In some places, it has been taxed at lower capital gains rates rather than as ordinary income, which critics argue gives fund managers an unfair advantage. Several governments have changed or debated changing these rules.
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