What is carried interest? (And why do you want it?)

For a long time, the big appeal to working in private equity was the prospect of a big carried interest payout. But what exactly is carried interest? Why does everyone want it? And does it still exist?

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The simple version is that carried interest is a percentage of a successfully exited private equity deal paid out to the people in the private equity firm who worked on it.

However, there's a more complicated version too. 

Private equity firms go into deals with outside investors. In those deals, the passive investors – pension funds and ultra-high net worth individuals and the likes – are known as Limited Partners (LPs), and the private equity funds are known as General Partners (GPs).

GPs, after raising money from LPs, go shopping with the money they’ve raised. They identify a good potential target company which is private and purchase it. They spend a few years “improving” it (this is contentious, but a story for another time) and then sell it again, either to the public markets via an IPO or to another company that is looking to expand as a bolt-on M&A deal.

Once the deal is exited, the private equity firm has (hopefully) made a profit. Before it began the deal, it negotiated a benchmark, known as a hurdle rate, with its LPs. This hurdle rate is a rate of return at which the GP can actually begin to pay itself – everything below that belongs to the LPs.

Once the hurdle rate (usually around 7%) – is hit in a deal, a GP begins to allocate payments in the form of carried interest to the staff that worked on it. Depending on seniority, this can hit some mind-boggling figures – recruitment consultancy One Search said last year that London-based PE partners can take up more than 10% of a carried interest fee pool after a successful deal, cashing out more than $25m in personal compensation. Even VPs on the deal can expect 2-4% of the pool and earn more than $1m in compensation. Heidrick & Struggles noted last month that carried interest could still accumulate to €32m ($38m) for managing partners at the biggest firms, while even principals (VP/Director equivalents) could expect between €1.1m ($1.4m) and €5.2m ($6.3m) in carried interest depending on fund size.

On top of the huge pay packages, carried interested has usually enjoyed a favourable tax regime compared to other compensation methods. In the USA, it's taxed at capital gains rates (up to 20%) as opposed to income rates (up to 37%). The UK has enjoyed a similarly beneficial tax rate (up to 28%) which is due to end in April this year, when the tax rate will go up to 34%.

So, what’s the problem? 

Private equity (PE) as an industry has not been doing well recently. Higher interest rates mean funds are not as easy to raise as they used to be. It’s also become difficult for PE firms to exit their deals at a profit. S&P Global said that IPOs and "trade" (M&A) sell-ons were at the lowest levels they've been in years, at around $33.5bn in Q3 of 2025, compared to a $242bn peak in Q2 2022.

As a result, many PE firms are turning to the secondaries market, where firms sell their stakes in an investment to each other - a kind of financial game of hot potato. S&P Global said last October that secondaries had their largest market share since at least 2021 in Q3 of 2025. Secondaries are a relatively new way of discarding assets, and probably not sustainable – hot potato is not a game about holding onto the potato for as long as possible, after all.

The lack of real exit options is biting the industry. Back in November, private equity professionals admitted to the Wall Street Journal that they were downsizing their expectations for theoretical windfalls that might not materialize, and were more concerned with paying their kids’ private school tuition than with private jets.

It’s important to note that carried interest isn’t the primary way that private equity firms make money. Like other asset management firms, they charge investors a percentage of their assets under management (AuM) as a fee (around 2%). They also charge a management fee to the companies that they manage. 

Likewise, carried interest isn't the only aspect of private equity compensation - and according to our compensation report last year, private equity salaries and bonuses are roughly on par with investment banking already.

Carried interest and AuM management fees are also charged in private credit deals. These have grown in popularity since the financial crisis, but have questions are now being raised over some private credit investments. For example, a series of loans to e-commerce aggregators have led to some brutal write-downs in recent years. Bloomberg reported yesterday that Apollo wrote down a portion of its $170m financing to Perch, an Amazon brand aggregator, by 100%.

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