What Is A Carry Agreement

Our hypothetical U.S. fund (the Fund) is a limited partnership with an LLC as its primary care physician. Carrying consists of a special stake by the GP in the fund, which represents a right to 20% of its profits once the investor`s capital contributions have been returned and a preferential return on that capital has been paid. The customer`s share in the port is represented by a stake in the GP. The distribution of fund returns is often controlled by a distribution cascade. [7] [4] The returns generated by the investment are initially issued to repay the initial capital contribution of each investor, including the AIFM. [7] [4] This is not “deferred interest” as it is a return of principal (i.e., no interest). Second, returns are paid to investors other than the managers, up to a certain pre-agreed return (the “barrier rate” or the “preferred return”). [8] The usual barrier rate is 7-9% per year. [7] [4] Third, returns are paid to managers until they have also received a return equal to the obstacle rate (the “race to catch up”).

[7] Not all funds provide for an obstacle and a catch-up race. Often, returns are divided during the catch-up phase, with the manager receiving the largest share (e.B.80%) and investors a smaller share (e.B.20%) until the manager`s catch-up percentage has been collected. Fourth, once the manager`s returns match the investor`s returns, the split reverses, with the manager taking a smaller share (often 20%) and investors taking the highest share (often 80%) [4] Any manager`s returns that are higher than the manager`s initial contribution are “Carry” or “Carried Interest”. [9] Technically, investor returns are also deferred interest, but the term is generally used only for managers` returns. The typical amount of deferred interest is 20% for private equity and hedge funds. Notable examples of private equity funds that calculate deferred interest include Carlyle Group and Bain Capital. However, these funds have recently charged higher deferred interest rates, up to 30% for so-called “super carry”. Deferred interest capital gains do not fall within the scope of the relief for entrepreneurs – which would otherwise result in taxation of up to £5 million (£5.7 million) in profits at an effective rate of 10% – as the scope of this relief is too narrow to include carrying. In addition, the acquisition of a transfer right is considered to be the acquisition of securities within the meaning of the United Kingdom Working Securities Act. .