Carried interest

Carried interest, or carry, in finance, is a share of the profits of an investment paid to the investment manager specifically in alternative investments (private equity and hedge funds). It is a performance fee, rewarding the manager for enhancing performance. Since these fees are generally not taxed as normal income, some believe that the structure unfairly takes advantage of favorable tax treatment, e.g. in the United States. The origin of carried interest can be traced to the 16th century when European ships were crossing to Asia and the Americas. The captain of the ship would take a 20 % share of the profit from the carried goods to pay for the transport and the risk of sailing over oceans. The name is not connected with interest rates or interest payments on a loan or bank account. Today, the term is used to name the compensation collected by investment executives in private equity funds. In the United States, carried interest is taxed at the same rate as long-term capital gains. Because this tax rate is fairly low, the policy has been criticized as a way for the rich to pay less in taxes. 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, e.g., 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, but there is some variability. Notable examples of private equity firms with carried interest of more than 20% ("super carry") include Bain Capital and Providence Equity Partners. Hedge fund carry percentages have historically centered on 20% but have had greater variability than those of private equity funds.