Glossary / Carried Interest (Carry)
Carried interest, also known as "carry," is a share of profits that general partners in a private equity or hedge fund receive as compensation for managing the fund. It is a performance-based fee structure that aligns the interests of the general partners with those of the limited partners (investors) in the fund. The carry is typically calculated as a percentage of the fund's profits, usually around 20%. It is only paid to the general partners after the fund has generated a certain minimum return, known as the hurdle rate. This ensures that the general partners are rewarded for generating above-average returns for the investors. Carry is an important component of the compensation structure for general partners, as it provides them with a significant financial incentive to maximize the fund's performance. It also serves as a way to attract and retain talented investment professionals in the private equity and hedge fund industry. Critics of carried interest argue that it is a form of tax loophole, as the income generated from carry is often taxed at the capital gains rate, which is lower than the ordinary income tax rate. This has led to debates and discussions about potential changes to the tax treatment of carried interest. Overall, carried interest is a key element of the compensation structure in private equity and hedge funds, designed to align the interests of the general partners with those of the investors and incentivize superior investment performance.