Carried interest, often known simply as ‘carry’, is an incentive provided to private equity fund managers to ensure their interests are aligned with investors. Rewarded to fund managers on top of their management fees, carry is a percentage of the fund’s profits and plays a big role in private equity compensation.
On average, carry is about 20% of the fund’s profits. However, this can range up to as high as 50%, or way down to below 10% of the fund’s profits. With increasing competition from different firms to attract investor capita, carry is often decreasing as fund managers try to outdo each other to win investment.
While this general concept applies across the industry, it’s important to note that there are many different carry structures with varying complexity. More established firms with a good investment history have more favorable carry structures, while newer firms are often at a disadvantage.
Why is carry received by fund managers?
With the amount of work required to turn an investment into profit, it’s believed that carry is justified on top of management fees. Before investing, due diligence requires significant analysis, among other work. Once capital is invested in a company, fund managers must get involved in business operations and strategy, restructuring, and business development to make the most of their fund’s investment and maximize profitability.
How often is carry rewarded?
To encourage long-term profitability, investors prefer multi-year vesting periods. Typically, carry will be vested for 3-4 years, ranging anywhere from 1 year to 6 years in rare cases.
Who receives a share of carry?
Private equity firms often share carry between current teams, and old or existing owners. Retired partners also receive carry after their equity is bought or when they retire.
Among the current team, who receives a share of carry comes down to the years of experience of an employee. Only 14% of private equity professionals with less than 2 years experience will receive carry, compared to 70% of those with 20+ years experience. The majority of private equity professionals with at least six years of work experience have some level of carry as part of their compensation package, making it essential to fully understand how carried interest can boost your remuneration.
Carried interest is an important concept in the private equity industry, with plenty of potential to increase your compensation and rewards. While carry varies between funds and firms, it’s essential to understand how it works to ensure your compensation is fair.