Carried Interest (“Carry”)

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What It Means

Carried Interest, often referred to simply as “Carry”, refers to the share of profits that some Investors receive as compensation in a successful exit (as defined by certain pre-determined financial thresholds). Carry represents the primary means by which the general partners of an investment firm, such as a Private Equity firm, make money. Traditionally, Private Equity firms typically earn a Carry of 20%. Carry is calculated based on the profits left after all of the transaction fees have been paid, debt obligations have been met, and the original investment amount, provided by the firm’s limited partners, has been repaid plus any additional financial hurdles that may be contractually set between the Private Equity firm and their investors.

Why It’s Important

When a Private Equity firm is evaluating whether to invest in or purchase a company, it undertakes an exhausting process of modeling the expected financial outcome of the Acquisition. They project future growth, expenses, cash flows, and ultimately a future sale price for the company. They are banking on the fact that they can pay down whatever debt they use to purchase the company and make the company more valuable over time. They have a limited amount of time to make these improvements. Most Private Equity firms plan to hold investments for no more than 5 to 7 years. The increase in value for equity holders created over that period of time determines the value of the Carry.

Related Terms

• Acquisition

• Basis Point

• Buyer

• Buyout

• Leverage

• Private Equity

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