Carried interest, also called “carry”, refers to the portion of an investment’s profits that are paid to the investment manager. Carried interest is common among hedge funds, private equity, and venture capital, as well as for angel investments done through investment funds (for example, those on AngelList or FundersClub).
For example, say you invested $1,000 through an investment with 20% carried interest. If the investment return overall at the end was 50% (or $500), then 20% of that (or $100) would go to the fund manager as carried interest, and you would receive a net return of 40% (or $400). When reviewing projections and financials, be sure to note if returns are shown “net of carry”, indicating the actual amount you’d receive after the carried interest charges have been paid.
Many funds also charge an annual “assets under management” fee (AUM), typically 1-2%. In the case of your $1,000 investment, that would be $20/year. If it took 7 years to see that 50% return (not uncommon with angel investments, if they return at all), then if the charges were “2 and 20” (meaning a 2% AUM fee and 20% carried interest), you’d end up paying $140 in those AUM fees, plus the $100 in carried interest. Your actual return would be $1,260 on your $1,000 investment.
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