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Carried interest, often referred to as "carry," is a share of the profits from an investment or investment fund that is paid to the fund manager, in addition to any management fees. This is a significant source of income for managers of private equity funds, venture capital funds, hedge funds, and other types of investment funds.
Carried interest is usually expressed as a percentage of the total profits generated by the fund, and it's meant to serve as an incentive for the fund manager to maximize the fund's performance. The typical carried interest rate often falls around 20%, but it can vary depending on the fund's strategy and the agreement with investors.
Here's a simple example: If a private equity fund generates €100 million in profits and the carried interest rate is 20%, the fund manager would receive €20 million as carried interest.
However, it's important to note that the carried interest is typically subject to a "hurdle rate" or "preferred return." This means that the fund manager only starts to receive carried interest once the fund has achieved a certain minimum rate of return for its investors. This mechanism further aligns the interests of fund managers with those of their investors.
The treatment of carried interest has been a topic of discussion in many jurisdictions, particularly relating to its taxation.
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