Private Equity and Carried Interest

Carried interest continues to be a topic of discussion among certain elected officials.  The Obama Administration’s 2015 budget recommendations included a proposal to tax gains from carried interest at the personal income tax rate as opposed to the current capital gains tax rate. If Congress went along with the Obama Administration’s tax increase proposal, the tax increase would amount to about $28 billion over the next ten years.

Here are the results of a recent survey by JobSearchDigest.com regarding carried interest.

After the profit realization of the fund, carried interest is distributed to private equity or venture capital professionals, based on their individual share of the fee, which is known as the personal carry. In general, carried interest allocations are around 20 percent (most common as indicated by 45 percent of firms responding to the survey) of a given fund’s profit among private equity and venture capital firms.  Following the standard 20% are funds with less than 20%, making up 43% of the total. Lastly, only about 12% of fund operate with more than 20% as its carried interest pool.

Interesting, although there appeared to be many discussions about the private equity industry moving away from the 2 and 20 carried management fee/carried interest standard, JobSearchDigest.com’s survey results found no evidence of any real shift in the structure of the carried interest pool.

What two factors determine whether a private equity professional will participate in a carried interest pool and how much of a share they will receive? It appears that years of experience with the firm and their seniority within the firm are leading criteria for carried interest pool participation, based upon JobSearchDigest.com’s survey results.

On top are professionals in the 10 to 15 years of experience category at a little over 70%.  Following the 10 to 15 years of experience category are individuals with 20 or more years of experience and individuals with 16 to 19 years of experience at around 65%.  On the other end of the scale, individuals with less than five years of experience have the least carry percentage.  Private equity and venture capital professionals with 2 to 5 years are at a little less than 30%, while individuals with less than 2 years of experience are at around 20%.

The survey results also found that associates and senior associates saw their participation rate fall, being increasingly left out on the sidelines.  While in contrast, senior professionals such as Partners, Managing Directors, and Vice Presidents continued to enjoy regular participation in the carried interest allocation.

Overall, carried interest continues to be a central tenant of private equity and venture capital compensation.  Perhaps unfortunately, some elected officials seem to think that a larger portion of this compensation should belong to the federal government.