Carried interest

The share of a fund's profit that the manager keeps, conventionally around twenty percent, usually payable only above a defined return to investors.

Example

On 100,000 of profit above the commitment, a 20% carry is 20,000.

Important

It is why gross and net multiples differ so much. On one worked structure a gross 2.50x reached the investor as 1.80x - a gap of 0.70x, or 28.0% of the gross figure.

Related terms

• Hurdle rate — The return a fund must deliver to its investors before the manager becomes entitled to a share of the profit.
• MOIC (multiple on invested capital) — Total value divided by the money put in - 300,000 back on 100,000 is 3.00x.
• Fee drag — The compounding cost of fees over time, which is far larger than the fee's annual percentage suggests on its own.

Lessons that explain it

• A fund must return far more than its investments cost to deliver its target to investors — Fees, carried interest and reserves mean a venture fund's portfolio must earn a much higher gross multiple than the net multiple its investors receive. Working backwards shows what a fund needs from its best companies. (12 min)
• A hurdle protects LPs when returns are modest, and a catch-up gives it back when they are strong — Carried interest is the manager's share of profits. A hurdle rate means LPs receive a minimum return before carry is paid; a catch-up then lets the manager receive its full share once returns clear the hurdle. (14 min)
• A syndicate lets you back one deal alongside a lead, and charges carry on that one deal — Syndicates pool individual investors into a single-purpose vehicle to invest in one company alongside a lead investor. They lower minimums and provide access, while charging carry and fees on each deal. (12 min)
• Ask how the manager gets rich, and whether it requires you to — Fund economics shape manager behaviour. Alignment is strongest when managers commit meaningful personal capital, depend on carry rather than fees, and keep fund sizes suited to their strategy. (10 min)
• Access and diversification, bought with a second layer of fees — Funds of funds and investment platforms give individuals access to managers and diversification they could not reach directly, in exchange for fees charged on top of the underlying funds' own fees. (11 min)
• Buying a whole company, mostly with somebody else's money — A private equity fund buys control of established companies, usually financing much of the price with debt the company itself must repay. (9 min)

All 578 terms in the Investing glossary