The Trillion Dollar Bonus of Private Capital Fund Managers

Carried interest (carry) is the main performance-based component of compensation for private capital fund managers. Using fund-level cash flows and fee terms for more than 12,000 funds, we estimate which funds are in the carry and the total amount earned. Aggregate carry exceeds one trillion dollars and accounts for 18% of investor profits, about equal the contractual value-weighted rate of 19%. The difference reflects the role of hurdle rates and the relatively smooth distribution of fund outcomes. Carry is strongly related to both performance and fund size, and past carry is a stronger predictor of future performance than past returns.

This paper was accepted by Lukas Schmid, finance.