As most readers know, "carried interest" (the name of this blog) or "carry" refers to a private equity manager's share of the profits made on investments. Jim Chen's blog has a good primer on carry.
In the past week I've heard several industry insiders blame Prudential for the bust up with Catalyst because "they took some of the management team's carry." In other words, not all the traditional 20% carry made it to the Catalyst team.
I agree that carry split probably was the core issue, just as it was with the spin out of the Ironbridge team from Gresham. But the reality is that few private equity teams keep all twenty points of carry. Why not?
- Founding partners who are no longer active in the business often get paid a share of carry as a form of buyout. This 'tax' usually lasts for one or two funds after retirement.
- If the fund is captive, the parent company typically grabs up to half of the available 20% carry (no wonder few captive firms are sustainable).
- Most amicable private equity spin outs involve a legacy carry payment to the old owners. For example, Archer Capital is known to pay a share of carry to Grant Samuel.
- The private equity firm may be independent but have a minority shareholder. In Australia for instance, CHAMP shares a healthy chunk of their carry with American shareholder Castle Harlan.
- Likewise, an anchor investor in a fund may get a share of carry to reward them for their critical role in getting a first fund up and running.
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