Carried Interest
Carried Interest
Private Equity Carried Interest
Carried interest is the percentage of profits that the general partners of a private equity fund receive as an incentive for good performance. The carried interest compensation typically ranges from 20-30% of profits which is a substantial amount of money for the fund’s investors.
Private Equity Carried Interest
A private equity fund is a partnership created to obtain a significant (often majority) stake in an expanding or underperforming company. Outside investors, the limited partners, provide most of the funding capital typically 90-97%. The remaining funding of 3-10% is provided by the general partners of the fund who in turn receive management fees. The typical compensation set up for private equity fund managers is 1-2% of the total fund assets and the carried interest. This arrangement is often very beneficial for the manager and serves as a method for investors to motivate and reward good performance by the general partners.
Carried Interest Tax
There is a large amount of controversy surrounding the taxation of private equity carried interest. Currently, carried interest is taxed as long-term capital gains but advocates for private equity tax reform would like carried interest to be taxed as ordinary income. The change would raise taxes for carried interest from the current 15% to as high as 35%. The most recent attempt to alter the taxation of carried interest was proposed by Republican Senator Charles Grassley but private equity advocates challenged the proposal and it is unlikely that private equity tax reform will occur anytime soon.
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