Carried Interest

Carried interest, often called simply "carry," is how private fund managers share in the upside they generate for investors. After a fund's investments are sold and investors have recovered their capital (and often a minimum annual return called a hurdle rate), the general partner receives a percentage of the remaining profits. This percentage is the carried interest. It aligns the manager's financial incentives with investors' outcomes, since carry has no value if the fund does not perform.

For families investing in private funds, understanding carry is important for two reasons. First, it directly reduces the net return an investor receives: the gross profit is shared before the family sees its net distribution. Second, the tax treatment of carried interest has been a recurring subject of legislative debate; a qualified tax attorney or CPA must advise on its current treatment and any implications for a specific family's situation.

Hypothetically, suppose a private equity fund generates an illustrative $40 million profit above the hurdle rate. If the general partner's carry is structured at a common rate, the manager would receive a meaningful portion of that $40 million: dollars that would otherwise flow to investors. Families should read fund documents carefully to understand exactly how carry is calculated, including whether a clawback provision exists to recapture carry if later losses reduce overall performance.

Carry is distinct from management fees, which are charged on committed or invested capital regardless of performance. See private markets overview for broader context on private fund fee structures.