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Carried Interest Calculator

Equity investment calculators

What is Carried Interest?

Carried Interest is the proportion of an investment fund's returns that is allocated to the fund's general partners or portfolio managers. It serves as a performance fee and can be perceived as a primary revenue source for the portfolio managers. The higher the fund's performance, the higher the carry distributions become. As such, carried interest serves to align the interests of the investors and portfolio managers.

Using the Carried Interest Calculator

To calculate Carried Interest, you require several inputs:

  1. Initial Fund Value: Your starting investment amount.

  2. Final Fund Value: The final total value you receive from the fund.

  3. Hold Period: The duration to hold the investment.

  4. Hurdle Rate: The minimum return that the investment fund must achieve to receive its carry distribution.

  5. Carried Interest Rate: The percentage of the total fund return claimed by the investment fund as a performance fee.

The Carried Interest Calculator follows these four steps:

  • Calculate the fund return: (Final Fund Value / Initial Fund Value) - 1.

  • Identify the hurdle rate: This is an input value.

  • Identify the carried interest: This is also an input value.

  • Identify the hold period: Again, an input value.

  • Calculate the carried interest and carry distribution: (Final Fund Value - Initial Fund Value * (1 + Hurdle Rate) ^ Hold Period) * Carried Interest.

Note: If the carry distribution is negative, the investment fund's performance was lower than the hurdle rate, and thereby no carry distributions will be given to the portfolio managers.

Example of Using a Carried Interest Calculator

For example, let's consider the Fund Alpha:

  • Initial Fund Value: $10,000,000

  • Final Fund Value: $20,000,000

  • Hold Period: 5 years

  • Hurdle Rate: 5%

  • Carried Interest: 20%

Following the steps identified above:

  1. Calculate the fund return: ($20,000,000 / $10,000,000) - 1 = 100%

  2. The hurdle rate for Fund Alpha is 5%.

  3. The carried interest for Fund Alpha is 20%.

  4. The hold period for Fund Alpha is 5 years.

  5. Calculate the carried interest and carry distribution: ($20,000,000 - $10,000,000 * (1 + 5%) ^ 5) * 20% = $1,447,436.87.

This tells you that the carry distribution, or carried interest, for Fund Alpha over 5 years, assuming the fund returns 100%, will be $1,447,436.87.

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