Carried Interest

The performance fee earned by private equity, venture capital, and hedge fund managers — typically 20% of profits above a hurdle rate.

Carried interest (or 'carry') is the share of investment profits that private equity, venture capital, and hedge fund managers receive as compensation for managing a fund. The standard structure is '2 and 20': a 2% annual management fee on assets under management and 20% of profits above a minimum return threshold (the 'hurdle rate,' typically 8%). The 20% of profits is the carry — and for successful fund managers, it can represent tens or hundreds of millions of dollars.

Carried interest is taxed as long-term capital gains (currently 20%) rather than ordinary income (up to 37%), provided the investment is held for more than three years. This treatment has been politically controversial for decades because fund managers are earning carry as compensation for their management work — not because they invested their own capital. The Tax Cuts and Jobs Act of 2017 extended the holding period requirement from 1 to 3 years, but left the capital gains rate intact.

For employees at PE and VC firms below the partner level, carry is often a meaningful component of compensation. Associates, VPs, and principals typically receive a small percentage of the carry pool — perhaps 0.1–1% of fund carry — which can still be worth millions if the fund performs. Carry is illiquid and subject to vesting (usually based on fund performance period), so it's a very long-horizon compensation component. Understanding the fund's vintage, investment pace, and performance prospects is essential for evaluating the value of carry.