Carried interest, also known as "carry," is a share of the profits that investment fund managers, particularly venture capital (VC) and private equity (PE) firms, receive as compensation for managing a fund. It is typically a percentage of the fund’s profits and serves as an incentive for fund managers to generate high returns for investors.
How does carried interest work?
Carried interest is a performance-based compensation structure where fund managers receive a percentage of the fund’s profits, usually after investors receive their initial investment and a predetermined minimum return (hurdle rate). For example, if a venture capital firm has a 20% carried interest and generates €100 million in profits, the fund managers would receive €20 million in carry.
Why is carried interest important in venture capital and private equity?
Carried interest aligns the interests of fund managers with those of investors by rewarding managers only when the fund performs well. This incentive structure motivates VCs and PE firms to seek high-return investments, benefiting both fund managers and their investors.
What is the typical percentage of carried interest?
The standard carried interest in venture capital and private equity funds is 20%, though it can range from 15% to 30% depending on the fund’s structure and track record. Some top-performing funds may negotiate higher carry, while newer funds may accept lower percentages to attract investors.
How is carried interest different from management fees?
Carried interest is based on fund performance and is only paid when profits are realized, whereas management fees are charged annually (typically around 2% of assets under management) to cover operational costs, regardless of fund performance. Carry is the primary way fund managers earn significant compensation, while management fees ensure ongoing operational support.
Do startup founders need to worry about carried interest?
While founders don’t directly receive carried interest, it affects how venture capitalists make investment decisions. VCs seek high-growth startups to maximize fund returns, which influences how they assess risk, structure deals, and plan for exits. Understanding carry can help founders align their business strategy with investor expectations.
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