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 Private Equity Compensation Report.
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.
