Carried interest: The cornerstone of private capital remuneration

While headlines frequently focus on fund returns or regulatory shifts, carried interest, or 'carry', sits at the heart of how investment managers are incentivised, aligning their interests with those of investors.

In an era of complex and bespoke fund structures the administration of carried interest is increasingly a strategic consideration for investment managers, as Stephanie Webb, Head of Fund Services, explains.

What is carried interest and why does it matter?

Carried interest represents the share of profits allocated to investment managers once a fund surpasses a predefined hurdle rate and investors have received an agreed return. It is a performance-linked reward designed to ensure managers prosper only when investors do.

In private equity and private credit, carry is typically around 20 per cent of profits, though structures vary widely across jurisdictions and asset classes.

For managers, carry is more than remuneration, it's a signal of alignment. For investors, it is a mechanism that incentivises disciplined capital deployment.

Stephanie explains:

The administrative challenge behind carry

While conceptually straightforward, the operational reality of carry is complex. Partnership agreements, carry plans and contractual terms need to be clearly defined, and the administration and execution of the agreed terms should preserve the commercial intent now and in the future. Waterfall calculations have become more complex, often multi-tiered with multiple hurdles. Calculating carry distributions requires granular tracking of many data points.

Stephanie elaborates:

Why carry is back in focus

Several factors are pushing carried interest into the spotlight: regulatory reform, with notable changes being implemented in the UK and Luxembourg, the increased use of continuation vehicles, implementation of NAV loans, co-investment vehicles and hybrid fund structures; and increased investor demand for transparency around carried interest arrangements. The regulatory and market changes are making carry arrangements increasingly complex.

Carry arrangements are used to create competitive edge, attract and retain senior investment professionals, managers are reviewing their structures to ensure they operate as intended within the new rules and changing market.

The strategic edge for service providers

Managers need accurate, timely and jurisdiction-sensitive carry solutions, which is why making carried interest a core competency for Mourant is so important.

Carry administration sits at the intersection of complex fund economics, sensitive performance based remuneration, and high stakes investor reporting. A strong relationship between the administrator and the investment manager increases the accuracy efficiency and trust.

Our dedicated and skilled teams utilising the latest technology, reduces reputation and operational risk for the investment manager.  

As Stephanie observes:

Looking ahead

As private capital markets evolve, carried interest will remain a defining feature of the remuneration landscape for investment managers. Carried interest administration will continue to grow more intricate, shaped by bespoke fund structures, investor demands and regulatory scrutiny.

To find out more about Mourant's Fund Services, contact Stephanie directly.