Carried Interest (Carry)
Definition
The share of investment profits that a fund manager (general partner) receives as performance-based compensation, typically 20% of profits above a hurdle rate. Carry is the primary financial incentive for venture capital and private equity fund managers. Carry incentivises fund managers to maximise returns through effective portfolio company value creation, including the development and monetisation of intangible assets such as intellectual property, brand equity, and customer relationships.
Complementary Terms
Concepts that frequently appear alongside Carried Interest (Carry) in practice.
The managing entity of a private equity or venture capital fund, responsible for making investment decisions, managing portfolio companies, and generating returns for investors. GPs typically earn management fees and carried interest.
The ratio of earnings before interest and taxes (EBIT) to interest expense, measuring a company's ability to meet its interest obligations from operating profits. A higher ratio indicates greater financial headroom and lower default risk.
A reduction applied to the pro rata value of a business to reflect the disadvantages of owning a non-controlling interest, including inability to direct business strategy, set compensation, force distributions, or compel liquidation. The minority interest discount is the mathematical complement of the control premium and is typically applied when valuing interests of less than 50% in private companies.
An investment vehicle that allocates capital to a portfolio of private equity, venture capital, or hedge fund managers rather than investing directly in companies. Fund of funds provide diversification across managers, strategies, and vintages, though they involve an additional layer of management fees and carried interest.
The year in which a private equity or venture capital fund makes its first investment or its final close. Vintage year is used to group and compare fund performance because macroeconomic conditions at the time of investment significantly influence returns.
An investor in a private equity or venture capital fund who contributes capital but does not participate in day-to-day investment management. LPs include pension funds, endowments, family offices, sovereign wealth funds, and high-net-worth individuals.
An equity-based compensation structure in private equity-backed companies that aligns management's financial interests with those of the PE sponsor by giving managers the opportunity to share in the equity upside upon exit. MIPs typically allocate 10-20% of the equity to management through sweet equity, share options, or ratchet mechanisms linked to achieving specified return hurdles.
A separate legal entity created for a specific financial purpose, such as isolating risk, holding assets, or facilitating a particular investment. SPVs are commonly used in venture capital for individual deal syndication and in private equity for structuring leveraged acquisitions.
Related FAQ
What are liquidation preferences and how do they affect founders?
Liquidation preferences give investors priority over common shareholders in an exit, ensuring they recover their investment first — participating preferences can significantly reduce founder payouts in moderate exit scenarios.
Read full answer →What is Section 859A and why does it matter for IP loans?
Section 859A of the Companies Act 2006 requires most company charges to be registered at Companies House within 21 days. Miss the deadline and the security is void against a liquidator or administrator.
Read full answer →Why does chain of title matter for an IP loan?
Chain of title matters because a lender can only take security over IP the borrower genuinely owns. Gaps, such as unassigned contractor or employee work, can void the collateral and stop the loan.
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