Carried Interest (Carry)

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 annual fee charged by a fund manager (general partner) to cover operational costs, typically calculated as 1.5% to 2.5% of committed capital during the investment period and assets under management thereafter. Management fees are separate from carried interest.

The minimum rate of return that a fund must achieve before the general partner becomes entitled to carried interest, or the minimum acceptable return for an investment decision. Hurdle rates are typically set between 6% and 8% in PE/VC fund structures and serve as a performance benchmark that aligns manager and investor incentives.

The equity in a subsidiary not attributable to the parent company, representing the ownership stake held by minority shareholders. Under IFRS 3 and ASC 805, non-controlling interests in a business combination are measured either at fair value (which results in full goodwill) or at the NCI's proportionate share of the acquiree's identifiable net assets (which results in partial goodwill).

The legal process by which a creditor's security interest in collateral becomes enforceable against third parties, typically through registration (UCC filing, PPSA registration, or Companies House filing), possession of the collateral, or control over financial assets. Perfection establishes the creditor's priority ranking relative to other secured parties.

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.

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.