Carried Interest

Carried interest (or “carry in finance”) is the share of investment profits paid to an investment manager that exceeds the amount the manager contributes to the investment pool. Carried interest rates can vary depending on the types of investments and how active of a role the investment manager plays in the investment activity. In private equity, rates around 20% are common. Before receiving the interest, the fund typically must return all capital invested by the investment partners. In many cases, managers must hit a target rate of return before receiving the interest. Carried interest differs from a management fee charged by an investment manager. A management fee is paid by the investors, is used by a manager to cover fees and costs and typically is around 1% to 2% of committed capital a year. Carried interest, by contrast is a much higher rate and is the primary source of wealth creation for a manager. The interest has been historically taxed at a capital gains rate, but this treatment is subject to ongoing debate by lawmakers. The debate centers on whether managers should receive tax benefits on gains realized on money invested by the fund participants and not invested by the managers directly.