Carried interest refers to the share of profits that general partners of private equity funds or venture capital firms receive in return for their management and performance of the fund. It is also commonly known as "carry."
In a typical private equity or venture capital fund structure, the limited partners (LPs) contribute capital to the fund and the general partners (GPs) manage the fund and make investment decisions. The GPs are usually compensated with both a management fee and carried interest.
The carried interest is usually structured as a percentage of the profits made on investments above a certain threshold. For example, if a venture capital fund has a 20% carried interest, the GP would receive 20% of the profits made on investments once the LPs have received their initial capital plus a certain rate of return (known as the "hurdle rate").
Carried interest is a controversial topic, as it is often taxed at a lower rate than ordinary income, such as salary or wages. Critics argue that this tax treatment is unfair, as it allows GPs to pay lower taxes on their earnings. Proponents of carried interest argue that it is a necessary incentive to motivate GPs to perform well and generate high returns for the fund.