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. Royalty

    A payment to an owner for the use of property, especially patents, ...
  3. Performance-Based Compensation

    An incentive-based form of compensation that is reserved for ...
  4. Long-Term Incentive Plan - LTIP

    A reward system designed to improve employees' long-term performance ...
  5. Severance Tax

    A tax imposed on the removal of nonrenewable resources such as ...
  6. Fund Manager

    The person(s) resposible for implementing a fund's investing ...
Related Articles
  1. How To Invest In Private Equity
    Mutual Funds & ETFs

    How To Invest In Private Equity

  2. A New Approach To Equity Compensation ...
    Options & Futures

    A New Approach To Equity Compensation ...

  3. Evaluating Executive Compensation
    Options & Futures

    Evaluating Executive Compensation

  4. Hedge Fund Fees: Exotic Expenses
    Investing Basics

    Hedge Fund Fees: Exotic Expenses

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center