Private Equity Managers Have Earned Over $1 Trillion in Carried Interest

What's New: 

According to a recent academic study by Ludovic Phalippou, Professor of Financial Economics at Oxford University's Saïd Business School, private capital fund managers have accumulated more than $1 trillion in carried interest—the performance-based compensation known as "carry"—from funds raised between 2000 and 2019. This first comprehensive quantification reveals that carry consumes approximately 18% of investor profits, closely matching the standard contractual rate of 19-20%. The analysis, which examined fee terms and performance data for over 12,000 funds representing $8 trillion in deployed capital, provides unprecedented insight into one of finance's most debated compensation structures.

Why It Matters: 

The trillion-dollar scale of carried interest fundamentally reshapes policy debates around taxation and financial sector compensation. While favorable tax treatment of carry is frequently justified by venture capital's role in innovation, the study finds that leveraged buyouts account for over half of all carry, while venture capital represents less than 10%. This concentration matters for tax policy discussions, as taxing carry as ordinary income rather than capital gains could have generated approximately $250 billion in additional U.S. revenue over the sample period. The findings also illuminate inequality dynamics and suggest that carry payments may be substantial enough to influence top-income statistics and executive compensation benchmarks across industries.

Big Picture Drivers:

• Geographic concentration: U.S.-based managers capture 70% of the carry pool despite American investors providing less than one-third of committed capital, reflecting the dominance of U.S. financial centers in private capital management.

• Strategy imbalance: Leveraged buyout funds generate more than half of total carry, while venture capital—the strategy most commonly cited in policy justifications—accounts for under $100 billion, revealing a mismatch between policy rhetoric and economic reality.

• Structural efficiency: The closed-end structure of private equity funds, combined with hurdle rates and clawback provisions, creates tight alignment between contractual carry rates (typically 20%) and effective rates (18% of profits), unlike hedge funds where these figures diverge sharply.

• Scale effects: The trillion-dollar aggregate arises primarily from many funds clearing their hurdle rates on a large capital base rather than from extreme fee incidence, with approximately 69% of funds paying carry and the distribution of outcomes relatively smooth compared to other alternative asset classes.

• Investor selection matters: While most limited partners face effective carry rates close to contractual terms, approximately 2.4% pay above 25% of profits due to portfolio composition effects, with endowments and public pensions systematically achieving lower effective rates through more homogeneous portfolio construction.

By The Numbers:

• $1.127 trillion: Total carried interest earned on funds in the working sample, combining realized payments and unrealized amounts implied by current valuations

• 18%: Effective share of investor profits absorbed by carry across all strategies, compared to 19% value-weighted contractual rate

• 76-79%: Proportion of buyout funds that cleared their hurdle rate and paid carry, the highest percentage among major strategies

• $358 billion: Carry earned by U.S. buyout funds alone, representing roughly one-third of the total carry pool

• $532 billion: Additional estimated carry from 27,446 funds lacking performance data (conservative scenario), suggesting total industry carry potentially reaches $1.4-1.5 trillion

Key Trends to Watch:

• Investor-level carry incidence varies systematically by institution type. Asset managers face the highest effective carry rates (18.4% of profits, with 5% paying above 25%), while endowments consistently pay lower rates even after controlling for performance, suggesting sophisticated portfolio construction that generates more homogeneous outcome distributions.

• Past carry predicts future performance better than past returns in non-overlapping fund sequences. When requiring a minimum five-year gap between successive funds, traditional performance persistence disappears, but the relationship between prior carry and subsequent risk-adjusted returns (measured by PME) remains robust, indicating that realized compensation contains unique information about manager quality.

• Effective carry rates prove remarkably stable despite portfolio composition differences. Cross-sectional variation in LP characteristics like geography, strategy allocation, and fund-of-funds exposure initially appear to drive differential carry burdens, but most gaps shrink substantially after controlling for these compositional factors, suggesting the waterfall structure limits extreme outcomes.

• NAV sensitivity analysis reveals carry estimates are robust to substantial valuation uncertainty. Even a 50% markdown of remaining net asset values produces relatively modest reductions in aggregate carry, with carry falling by roughly half only under extreme 90% write-downs, because the large totals reflect many mature funds already in-the-carry rather than fragile valuation assumptions on unrealized portfolios.

The Wrap: 

The first comprehensive measurement of carried interest in private markets establishes that the compensation structure functions largely as designed, with effective rates tracking contractual terms across most investor types and strategies. However, the enormous scale—exceeding $1 trillion—combined with heavy concentration in leveraged buyouts rather than venture capital, raises important questions for policymakers weighing tax treatment and financial sector size. The tight relationship between carry and risk-adjusted performance, particularly when measured by scaled abnormal returns, suggests that compensation does correlate with value creation, though the study makes no normative claims about optimal tax policy. For institutional investors, the evidence that endowments and public pensions achieve systematically lower effective carry rates through portfolio construction offers a roadmap for improved fee management.