Carried Interest Explained: How it Works and Who it Benefits

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2023-01-25 02:30:05

Carried interest (often known simply as “carry’) is the main way that fund managers and angel syndicate leads get paid for their work.

In short, carried interest is a share of the profits from an investment made in a fund or SPV. It is paid to the fund manager or syndicate lead when portfolio investments are sold at a profit. Carry is designed to align the incentives of the investor and the manager / lead.

You will receive back the $100k you invested, plus 85% of the profits - $850,000 - so $950k in total. The remaining 15% of profits - $150k - will be paid to the Syndicate Lead. This is their carried interest.

If the company sells at a loss, and your investment is only worth $50,000, then the Syndicate Lead will not earn any carried interest. They only profit if you profit, so they are incentivised to work hard to select high-quality investment opportunities and work closely with the people operating the business to ensure its success.

Angel syndicates investing via SPV’s on Odin charge carry at a deal-level, rather than across the entire portfolio of investments (which is how a fund charges carry). This can have a significant impact on your profits as fund manager or syndicate lead. It is one of the reasons that deal by deal investing with syndicates can actually be more profitable for the lead/manager than raising a fund.