Carried Interest

What it answers

Why would a private equity or venture capital manager work hard to grow your money rather than just collect a flat fee? Carried interest is the answer. It is the slice of profits the fund manager, or general partner (GP), takes home if the fund does well, aligning the manager's payday with the investors' gains.

How carry works in an AIF

In India this plays out inside Alternative Investment Funds (AIFs) regulated by SEBI. The structure usually splits investors and the manager into different unit classes. The limited partners put up the capital; a special class of units, often held by the sponsor or manager, is entitled to carry.

The classic split is 20% of profits to the GP, but only after investors first receive their capital back plus a preferred return, called the hurdle rate. Indian PPM (private placement memorandum) terms commonly set this hurdle around 10-12%. Below the hurdle the manager earns only the regular management fee; above it, the GP starts sharing in the upside, sometimes with a catch-up provision that lets it draw closer to a full 20% of total profits once the hurdle is crossed.

Taxation and the Indian wrinkle

Carried interest sits in a grey zone of Indian tax law, which has no dedicated provision for it. In practice, when carry is distributed as capital gains on long-held fund investments, it tends to be taxed as long-term capital gains rather than ordinary income, a treatment GPs naturally prefer. This contrasts with the recurring debate in the US over whether carry should be taxed at lower capital-gains rates at all.

Why it matters

Carry is the engine of the private-fund business. For investors it is reassurance that the manager only gets rich if they do; for managers it is the chance at outsized rewards. SEBI's 2024 push for pro-rata and pari-passu treatment of AIF investors has also tightened how differential rights, including carry, are structured.