Carried Interests

Carried Interests

See Also:
Hedge Funds
Venture Capital
Current Expenditures
How to Compensate Sales Staff
Indirect Labor

Carried Interests Definition

What are carried interests? The carried interests definition is a portion of an investment fund’s annual profit that is given to the fund manager at the end of the year. Carried interests are designed to incentivize to the fund manager to achieve outstanding performance for the fund. They are often set at around 20% of the fund’s profits.
You can also call carried interest carry, or profit interests. Use the amount to compensate fund managers and general partners at private equity firms and hedge funds. The carried interest may be the primary source of compensation for the fund managers; however, it does not include any of the fund manager’s own money that he may have invested in the fund.
There may be a hurdle rate of return stipulated, as well. For instance, the policy at a private equity fund may be that all of the investors must earn at least 7% return on their initial investment. In addition, the policy may consider everything above and beyond that pure profit and may use it to compute the fund manager’s carry.

Carried Interest Example

For example, a hedge fund has $100 million of invested capital from 10 investors. The hedge fund has told the investors to expect at lease a 5% return on their investment. In addition, the fund manager will earn a 20% carry on the profits above the 5% hurdle rate. Now, motivate the fund manager to maximize the fund’s performance. Furthermore, he will earn 20% of anything above $105 million.
At the end of the year, the fund is worth $125 million. The fund made a profit of $25 million, or 25%. Let’s see how much of this profit will go to the fund manager for his efforts.

Profit the Fund Manager Gets

Ten investors contributed $10 million each to make the full amount in the fund, $100 million. Each of the investors was told to expect at least a five percent return on their investments, or $500,000 each. For all ten investors, this adds up to $5 million. This means, according to the hurdle rate, the fund manager earns 20% on anything above $105 million.
The fund made $25 million. So subtract the $5 million for the hurdle rate. That leaves you with $20 million. Now, the fund manager earns 20% of the $20 million. This turns out to be $4 million. Then distribute the remaining $16 million among the investors or use it to cover other expenses or simply reinvest it in the fund.


If you want to overcome obstacles and prepare how your company is going to react to external factors, then download your free External Analysis whitepaper.
carried interests, Carried Interests Definition
[box]Strategic CFO Lab Member Extra
Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
carried interests, Carried Interests Definition

ARTICLES YOU MIGHT LIKE

The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »

IN CRISIS? GET A STRATEGIC CFO! – CEO Blindspots Podcast

Friend of the firm, Birgit Kamps, recently had Strategic CFO President, Dan Corredor, as a guest on her podcast, CEO Blindspots. CEO BLINDSPOTS HOST: Birgit Kamps. She was speaking five languages by the age of 10, and lived in five countries with her Dutch parents prior to becoming an American citizen. Birgit’s professional experience includes starting

Read More »

SHRM calls ICHRA the 401K for Group Health Benefits

Fed-up with group health insurance? ICHRA is the new way to offer great health benefits and avoid ACA penalties, SHRM calls it the 401K for group health benefits.  In 2020 the Department of Labor, HHS and IRS changed the rules for employer health benefits. They changed the Affordable Care Act mandates and penalties for every

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ SERIES

Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®

Days
Hours
Min

September 12-15th 2022