Carried interest

Carried interest or carry, in finance is a share of the profits of an investment paid to the investment manager in excess of the amount that the manager contributes to the partnership, specifically in alternative investments i.e., private equity and hedge funds. It is a performance fee rewarding the manager for enhancing performance.

The manager's carried-interest allocation varies depending on the type of investment fund and the demand for the fund from investors. In private equity, the standard carried-interest allocation historically has been 20% for funds making buyout and venture investments. Notable examples of private equity firms with carried interest of 25% to 30% include Bain Capital and Providence Equity Partners. In private equity, the distribution of carried interest is directed by a distribution waterfall: in order to receive carried interest, the manager must first return all capital contributed by the investors, and, in certain cases, a previously agreed-upon rate of return (the "hurdle rate" or "preferred return") to investors. Private equity funds distribute carried interest to the manager only upon a successful exit from an investment, which may take years. The customary hurdle rate in private equity is 7–8% per annum.

In a hedge fund environment, carried interest is usually referred to as a "performance fee" and because they invest in liquid investments, are often able to pay carried interest annually if the fund has generated a profit. They have historically centered on 20%, but have had greater variability than those of private equity funds. In extreme cases performance fees reach as high as 44% of a fund's profits, although usually it is between 15% and 20%.

Carried interest is a share of the profits of an investment paid to the investment manager in excess of the amount that the manager contributes to the partnership, specifically in alternative investments i.e., private equity and hedge funds. It is a performance fee rewarding the manager for enhancing performance.

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