What is carried interest? And who earns it? Carried interest, also known as “incentive allocation” or simply “carry,” is the percentage of fund profits charged to the investors as an incentive fee (on top of management fees). Carried interest is the proverbial “carrot” that keeps PE fund general partners striving for better performance.
Most funds typically allocate around 20 percent of the funds profits for carried interest. But the recent turmoil in the markets and less-than-stellar performance figures have put downward pressure on this benchmark over the past two years.
How is carried interest distributed among PE fund professionals? Unlike the hedge fund industry, where 70 percent of a fund’s staff may not receive any upside on performance, 52 percent of private equity professionals reported that they received some level of carry. That’s according to the 2010 Private Equity Compensation Report, published by JobSearchDigest.com
How is carry shared?
27 percent of Associates and 48 percent of Senior Associates reported receiving some carry, although typically at a level of 2 percent or less. Those with carry reported having a holding period of roughly 4 years before they were fully vested in their carried interest.
Perhaps the greatest indicator of whether you will receive carry at a PE firm is how much work experience you have. More experience translates into more senior positions, thus greater carry. The majority of private equity professionals with 10 years or more of work experience have some level of carry as part of their compensation package.
You can read the full 2010 Private Equity Compensation Report at
www.PrivateEquityCompensation.com
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Carried interest is not counted as salary so they are getting a relaxation in taxation, paying 15% instead of 35% (if considered as a normal salary). In addition to recent turmoil in the markets, executives at buyout, venture-capital and hedge-fund firms will pay an estimated $24 billion more in taxes over nine years if Carried Interest Taxation is implemented.
We’re not fans of additional taxation. Upside is great motivator and, if reward systems are built properly (that is, motivates behavior that drives long term thinking), extra taxation is a bad idea.
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