Carried interest is the share of a fund’s net profits allocated to the General Partner. It refers to the General Partner being carried by investors because it receives a share in profits disproportionate to its capital commitment to the fund.

For example, a hedge fund has $100 million of invested capital from 10 investors. The hedge fund has told the investors to expect at lease a 5% return on their investment. In addition, the fund manager will earn a 20% carry on the profits above the 5% hurdle rate.

Because carried interest is taxed at the 20% capital-gains rate rather than ordinary income rates up to 37%, investment managers pay lower rates than many wage earners. The private-equity industry is by no means mollified that the carried-interest break has survived.

The private equity carry (or simply “carry”) is performance compensation that the partners of a private equity fund receive if they exceed a specific threshold return. This compensation is meant to align the private equiteers with their capital providers, as the majority of their compensation comes from the carry.

Carried interest can be very lucrative because the Partners at the PE firm might contribute only 1-5% of the fund’s capital, but if it performs above the hurdle rate, they can claim 20% of the fund’s profits. Of course, it can easily go the other way as well.

By contrast, private equity firms make money by exiting their investments. They try to sell the companies at a much higher price than what they paid for them. The profits are then divided up based on a distribution waterfall. That’s why PE firms pay such high salaries to associates and investment staff.

A “Catch-up” in the private equity world is commonly used as a means for a fund Man- ager (“Manager”) to earn a fee equal to a per- centage of the profit but only after the investor has received back its investment and earned a preferred return (often expressed as an internal rate of return or “IRR”).

Carried interest is a contractual right that entitles the general partner of an investment fund to share in the fund’s profits. These funds invest in a wide range of assets, including real estate, natural resources, publicly traded stocks and bonds, and private businesses.

The typical carried interest amount is 20% for private equity and hedge funds. Carried interest is not automatic; it is only created when the fund generates profits that exceed a specified return level, often known as the hurdle rate.

What is Carried Interest? Carried interest is a major source of income for the general partner of a private equity or hedge fund. The general partner is usually a partnership of investment managers who contribute 1% to 5% of the fund’s initial capital.

To earn carried interest, general partners:

1. Find other investors.
2. Organize the fund.
3. Manage it.
4. Endure 100 percent of the risk.
5. Put up 0 percent to 10 percent of the capital.
6. Forge a relationship with entrepreneurs and the businesses in their portfolio.
7. Develop a strategy.

There are two primary methodologies for calculating carried interest: net profits and gross profits. Under the more common net profits methodology, carried interest is calculated as a percentage (usually 20%) of the profits generated from the fund’s investments less expenses, which typically include management fees…

Private Equity ETF. You can purchase shares of an exchange-traded fund (ETF) that tracks an index of publicly traded companies investing in private equities. Since you are buying individual shares over the stock exchange, you don’t have to worry about minimum investment requirements.

Carried interest capital gains income are the profits from a long-term partnership formed between individuals with capital and an expert investor. They are indistinguishable from any other type of capital gains and are appropriately taxed as capital gains.

Structure of Private Equity. Private equity funds are mostly structured as closed-end investment vehicles. Private is started as a limited partnership by a fund manager or general partner. The fund manager sets forth the rules and regulations governing the fund.