What is carry interest?

Cargo interest is the share of capital gain that comes to the manager when selling a stake. It is an economic right for the benefit of the manager, to reward him for his work, a significant contribution to the performance of the investment. Managers have their eyes on this carry, because that is where they earn money decorated with their contributions.

The market practice is that the carry is of the order of 20% of the added value. This percentage is only a market practice, it can be set less for young managers and more for experienced managers. This is a capital gain: investors are first reimbursed for their contribution, sometimes paid interest in their contribution, before the manager touches his share.

Let's take an example. Investors invest 100, the manager places the 100 in a company X. The manager has the right to take 20% carry. If the investment is resold 300, investors will first receive their 100, then 80% of the capital gain, i.e. 160, while the manager will reach 40.

The carry can be calculated according to a deal-by-deal or whole fund model, with infinite variations between the two. The deal-by-deal provides for the capital gain to be calculated as investment-by-investment, while the whole fund plans to calculate this carry over all investments.

Let's take the same example. Investors invest 100, the manager places 30 in a company X, 20 in Y and 50 in . X is resold first at 60, then Y goes bankrupt, finally, is resold at 150.

In a deal-by-deal model, at the time of the sale of X, the investors get 30, and the 30 are distributed 80/20: 24 for investors, 6 for the manager. When Y was sold, nothing was returned, because the company went bankrupt. On the sale of the .pi., the investors take 50, and the capital value of 100 is shared for investors, 20 for the manager.

   Total investor: 184 , Total manager: 26.

In a whole fund model, when X was sold, investors recover 60. When Y was sold, nothing was returned, because the company went bankrupt. On the sale of the .pi., the investors take 40, and the capital gain of 110 is shared: 88 for investors, 22 for the manager.

   Total investor: 188 , Total manager: 22.

The deal-by-deal model is therefore much more favourable to managers. In some situations, the manager can receive large sums of money, while investors end up negative. That is why the pure deal-by-deal model, popularized in the United States, is very rare. There are often variants that reimburse investors on failed investments. Investors are negotiating for a whole-body model, managers to deal-by-deal, and an intermediate solution can be found.

‍