What is carried interest?
Carried interest, often called "carry", is the share of a fund's profit that goes to the fund manager as performance-based compensation. It is a central part of how private equity and venture capital funds reward their managers.
"2 and 20"
A common model is described as "2 and 20": an annual management fee of about 2 percent of capital under management, plus carried interest of about 20 percent of the profit. The carry is usually paid out only after investors have received their invested capital back, sometimes beyond a predetermined minimum return (hurdle rate).
Why does carried interest exist?
The purpose is to align the manager's interests with the investors': the manager earns substantially only when the fund delivers strong returns. How carried interest should be taxed is debated and handled differently across countries — always check current rules with a tax adviser.