What Does Private Equity Carry Mean?
The private equity carry (or simply "carry") is performance compensation that the partners of a private equity fund receive if they exceed a specific threshold return. This compensation is meant to align the private equiteers with their capital providers, as the majority of their compensation comes from the carry. Also called an outperformance fee, it sets a specific threshold investment return to beat on the fund (say 10%) and then gives the private equiteers a percent (usually 20%) of any returns above the threshold.
Divestopedia Explains Private Equity Carry
There are so many private equity funds now that there is increasing downward pressure on carry as fund managers compete with each other to attract investor capital. Moreover, fund managers receive a carry and a management fee, which are often negotiated in unison at fundraising time.
Fund managers justify the carry as a way to align their interests with those of the investors. The work they may perform to earn the carry and any management fees include strategy and investment thesis conceptualization, business development, due diligence, financial management, restructurings and operations management. The idea is that they will find a solid company with good management, support it financially and operationally, and then sell it sometime in the future for a couple more multiple turns. This earns a high return, which would in turn drive the carry.