Glossary
Returns and fees
What is carried interest?
The manager's share of profits above a hurdle.
Typically 20% over an 8% preferred return. It is an option on the fund's upside, which is precisely why incentives tilt towards risk in a weak vintage.
A worked example
A $500m fund returns $900m. LPs get their $500m back plus an 8% preferred return first. After the catch-up, the manager ends up with 20% of the $400m profit: $80m of carry.
Where it catches you in the game
- Year-end bonuses model the same asymmetry.
It comes up most on the private equity desk and the venture capital desk.
Related terms
Learn it by using it
Definitions stick once they've cost you money. Take a seat, make three calls a year and watch what carried interest does to your returns.