Carried Interest – Key Words & Phrases

Key Words

What is the meaning of:

CARRIED INTEREST?

“Carried Interest” (sometimes called “Carry”) is a term used to refer to one of the fees an investment manager may receive. It is a share of the investment’s profits, over and above any share of the investment profits that the manager may be due from the manager’s own initial contribution to the investment.
It is really a kind of “performance bonus,” because the greater the investment’s profits, the greater the manager’s “carried interest” is worth.

The term “carried interest” originated in the 1600’s, when a ship captain was awarded a percentage of the ship’s “carried” cargo for completing a successful sea voyage.

In “private equity” investments, the investment manager receives “carried interests” when the investment is completed, generally when the investment is sold.

In “hedge fund” investments, the investment manager receives “carried interest” at the conclusion of a year, determined by a percentage of the year’s profits.

Employees of investment management firms may be awarded a small share of the firm’s “carried interests,” to be vested over time, the way that other long-term incentives are awarded. It is a variant of stock, stock options and other forms of “equity” awarded by traditional investment firms. Like “equity awards” in traditional investment firms, “carried interests” often vest over time.

If you are offered “carried interests” by an employer, your “carried interests” may well come with “strings attached” in the form of non-compete agreements, requirements that you invest your own money at times, even forfeiture and “clawback” provisions that take your awards away from you if you fail to fulfill your obligations.

The “paperwork” involved really does need to be carefully reviewed by an attorney experienced in these matters. The rewards are potentially great, matched only by the risks involved.

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