Carried interest refers to the gains on transactions by private equity firms. True False

Carried interest refers to the gains on transactions by private equity firms.

True False

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Expert Solution

The Given statement is FALSE. The logic behind is enumerated as below:

Carried interest which is also known as “carry” is the share of profit earned by a Private equity fund or fund manager on the exit of investment done by the fund. This is the most important of total remuneration earned by Fund manager. It is an incentive compensation provided to private equity fund managers to align their interests with the fund’s capital-providing investors.

Basically, carry is a percentage of a fund’s profits that fund managers get to keep on top of their management fees, and is a significant component of private equity compensation.

It can be on the deal basis that earned on every deal or on whole fund basis. Generally, the split in profits among the limited partners that is the investors and the general partner that is fund manager is 80:20. Carried Interest in private equity is not earned automatically. It will be earned by a fund manager only when the profits of a fund exceed a specified return. This specified return is known as the Hurdle rate. If the fund manager is unable to achieve the hurdle rate it won’t be entitled to receive any carried interest.

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