SS108: What is Carried Interest?

SS108: What is Carried Interest?

Carried interest, commonly referred to as “carry,” is a share in profits that general partners receive in compensation for the management of a private equity deal or fund. In this episode, Charles discusses how carried interest works and who is entitled to receiving it.

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Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is carried interest.

Charles:
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Charles:
Carried interest commonly referred to as Carrie is a share in profits that general partners receive in compensation for the management of a private equity deal or fund like a real estate syndication. The origin of carried interest can be traced back to the 16th century when European ships mainly Venetian ships or crossing two Asia and the Americas, the captain of the ship would take a 20% share of the profit from the cured goods to pay for the transport and the risk of sailing over oceans while the investors took 80%. So how does cured interest affect real estate investors? Well, when investing into a real estate syndication, there are general partners and limited partners or investors. Most deals are set up as an 80 20 with 80% going to the limited partners above any preferred return, usually seven or 8% and 20% going to the general partners. The 20% paid to the general partners is a performance fee, and it directly aligns the general partners compensation with the performance of the asset or the fund, which is exactly what you want as a passive investor.

Charles:
So why is carried interest so controversial? Well, every once in a while you will hear in the news about carried interest or the carried interest loophole. Private equity investment managers are in the majority of their compensation from performance fees, the 20% the carry. If the assets are owned for three or more years, they’re performance fee. Compensation or carried interest is taxed at capital gains rate, which is a maximum rate of 20% compared with a top ordinary income rate, which is taxed at 37%. Now is carried interest, good or bad? Well carry interest incentivizes investment in the US economy, along with taking huge risks as a passive investor. In real estate syndication or other private equity investment, the 20% performance fee is paid out only after limited partners receive their preferred return. As a passive investor, myself, I believe carry interest provides an additional incentive to the general partners subsidized by the government. The 20% really is 25 or 30% if it was taxed at ordinary income, while passive investors still receive their preferred return and their 80%. Now carried interest is an indirect benefit of investing into passive real estate syndications. So I hope you enjoyed. Please remember to rate where you subscribe, submit comments and potential show topics at globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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