The Trillion Dollar Bonus of Private Capital Fund Managers

Abstract

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.