Financial Glossary
Carry or Carried Interest
Carried interest, commonly called carry, is the performance-based share of investment profits earned by a fund manager -- typically general partners (GPs) of private equity, venture capital, or real estate funds -- after returning invested capital to limited partners (LPs) and in some structures clearing a preferred return hurdle. Carry is conventionally set at 20 percent of profits, though rates vary. Because carry is economically tied to the appreciation of invested capital rather than ordinary services, it has historically been taxed at long-term capital gains rates under the carried interest provision of the U.S. tax code, a treatment that has been the subject of ongoing legislative debate.
Problem & Application
A real estate private equity fund raises $10 million from LPs, deploys it into multifamily acquisitions, and exits after five years with $16 million in proceeds. After returning the $10 million capital, $6 million in profit remains. If the fund has an 8 percent preferred return (hurdle), LPs first receive an 8 percent annualized return on contributed capital before carry is earned. Assuming the hurdle is cleared, the GP earns 20 percent carry on profits above the hurdle -- potentially $1 million or more depending on the waterfall structure. For fund sponsors using Parikh Financial for fund accounting, accurately tracking committed capital, called capital, distributions, and carried interest allocations across LP accounts requires a robust general ledger structure and often specialized fund administration software.
In Short
Carry is a vital component of fund management, fostering alignment between managers and investors. Transparent structuring ensures motivation while addressing regulatory and ethical concerns.