What is "carried interest" in the context of private equity?

In the context of private equity, "carried interest" refers specifically to the share of profits that general partners receive from the investment funds once certain performance benchmarks are met. This compensation structure is designed to align the interests of the general partners, who manage the fund, with those of the limited partners, who invest their capital.

Typically, general partners earn a standard management fee but also have the opportunity to earn a percentage of the profits generated by the fund, usually around 20%. This share of profits incentivizes general partners to maximize returns on investments, as they benefit from the success of the fund. Carried interest plays a crucial role in the compensation framework within the private equity industry, distinguishing the earnings of general partners from other sources of revenue like management fees or returns on initial capital contributions.