Carried Interest

AAA

DEFINITION of 'Carried Interest'

A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund's performance.

INVESTOPEDIA EXPLAINS 'Carried Interest'

Traditionally, the amount of carried interest comes out to around 20-25% of the fund's annual profit. While all funds tend to have a small management fee, the management fee is meant to only cover the costs of managing the fund, with the exception of compensating the fund manager.

Carried interest is meant to serve as the primary source of income for the general partner. However, the general partner must ensure that all the initial capital that the limited partners contribute is returned along with some previously agreed upon rate of return.

RELATED TERMS
  1. Private Equity

    Equity capital that is not quoted on a public exchange. Private ...
  2. Performance-Based Compensation

    An incentive-based form of compensation that is reserved for ...
  3. Management Fee

    A charge levied by an investment manager for managing an investment ...
  4. Long-Term Incentive Plan - LTIP

    A reward system designed to improve employees' long-term performance ...
  5. Fund Manager

    The person(s) resposible for implementing a fund's investing ...
  6. Royalty

    A payment to an owner for the use of property, especially patents, ...
RELATED FAQS
  1. What are the pros and cons of holding a non-controlling interest in a company?

    Most investors hold a non-controlling interest – also known as a minority interest – of the companies in which they own shares. ... Read Full Answer >>
  2. What type of funding options are available to a private company?

    Similar to public companies, private companies also need funding for various reasons. A business typically needs the greatest ... Read Full Answer >>
  3. Which federal regulatory agencies approved and are now responsible for enforcing ...

    Five federal regulatory agencies approved and are jointly responsible for enforcing the Volcker rule. These agencies include ... Read Full Answer >>
  4. Does the Volcker Rule prevent commercial banks from offering shares of hedge funds ...

    The Volcker Rule does not prevent commercial banks from offering trading services in hedge or private equity funds to their ... Read Full Answer >>
  5. What is the purpose of the Volcker Rule?

    The Volcker rule limits two main types of activities by large institutional banks. Banks are prohibited from engaging in ... Read Full Answer >>
  6. What types of positions might a Chartered Financial Analyst (CFA) hold?

    The types of positions that a Chartered Financial Analyst (CFA) is likely to hold include any position that deals with large ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    How To Invest In Private Equity

    Private Equity might be a pricey investment, but returns are on the rise and the payoff could be big.
  2. Options & Futures

    A New Approach To Equity Compensation

    The new financial accounting standard known as FAS 123R could take a bite out of your portfolio. Find out why here.
  3. Options & Futures

    Evaluating Executive Compensation

    Find out how to determine whether a CEO is being overpaid.
  4. Credit & Loans

    What is a Syndicated Loan?

    A syndicated loan is one that involves a group of lenders (called the syndicate) who pool their lending resources to make a loan.
  5. Investing Basics

    Explaining the Volcker Rule

    The Volcker Rule prevents commercial banks from engaging in high-risk, speculative trading for their own accounts.
  6. Personal Finance

    5 Assets Only The Ultra Rich Can Afford

    Yacht? Private jet? Not that unusual. If you’re rolling in the big bucks, you can buy something much more interesting.
  7. Investing

    Effects Of Interest Rate Hikes On Private Equity

    Private Equity firms would be wise to lock in current interest rates on their debt payments in anticipation of rate hikes.
  8. Entrepreneurship

    How to Exit Your Small Business with Grace

    Here is a guide for how best to leave your baby — your small business.
  9. Investing

    Impact Investing: How it Works and How to Invest

    Impact investing makes a positive impact, socially and/or environmentally, while also aiming to produce positive returns, and it's a growing trend.
  10. Investing Basics

    Explaining Privatization

    For a publicly traded company, privatization is the act of transitioning the company to ownership by private individuals.

You May Also Like

Hot Definitions
  1. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  2. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  3. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  4. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  5. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  6. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!