The competition is fierce. It is estimated that by 2019, three-quarters of all the equity firms plan on increasing their workforce. Around 61% of the workforce is increased as compared to the previous year. The remaining 25% says there’s no headcount changes, reports by a research firm Preqin.

What do you know about carried interest?

Carried interest or carry can be a share of any kind of profits that normally general partners of private equity firms and hedge funds get in the form of compensation, irrespective of whether they have made any contribution to the initial fund. This kind of compensation instigates general partners to enhance the fund’s performance. The carried interest is the primary source of income for general partners. As a result, these rounds about to 20-25% of the overall fund’s profit. Though all funds tend to charge a minimum management fee, this only manages to cover the cost for the managing fund. Besides this, the general partner must agree upon the initial fund the limited partners have agreed upon to be contributed evenly along with the previous rate of return. It is not automated, thus can be created only when the fund gains a profitable amount exceeding a specific rate of return known as the hurdle rate. If the hurdle rate does not achieve the amount that is expected, then the general partner is not eligible to receive a carry.

Private equity firms with a carried interest act like an added incentive for general partners and also for the decisions that are taken up by them. In short, this helps in deploying the money along with the profits gained from limited partner’s money.

Who keeps the carry?

To be specific, there are relatively very few private equity firms that get the entire amount contributed. However, partners that are retired often get the share of the carry up to a certain period of time, this usually happens as they were a part of a buyout of their equity in the firm. Most of the firms have a minor count of shareholders and at times are owned by a parent company.

Private equity is a more desirable industry to work in instead of investment banking. As private equity professionals, you will not just get the opportunity to invest but you will also get to advise clients. According to studies, it is said that the pay scale for professionals in the equity firm keeps increasing. You might want to know that the Limited partners in the U.S. are more generous on an average as compared to other countries such as Europe and Australia.

Private equity professionals are fortunate to be taking up careers in an equity firm where there is consistency in wages and not to forget, professionals in this domain are earning a handsome package. Different equity firms use different accounting approaches to carry. Some can be used on cash to record carry as it is paid and received while others can use it on an accrual basis where the investment returns are analyzed and the validations are periodically adjusted.