Carried Interest

Have you ever wondered how fund managers are motivated to achieve exceptional returns on your investments? The answer often lies in a financial concept called carried interest. Carried interest is a performance-based compensation structure that plays a crucial role in private equity and hedge funds. It allows fund managers to earn a share of the profits generated by the fund, which aligns their interests with those of the investors.

This guide will walk you through everything you need to know about carried interest, from its basic definition and historical development to its impact on investors and fund managers. You’ll learn how it works, the tax implications, and the global perspectives on this often-debated topic. By the end, you’ll have a clear understanding of how carried interest influences fund performance and compensation, and why it’s such an important aspect of the investment world.

What is Carried Interest?

Carried interest is a financial term that refers to the share of profits that fund managers receive as compensation for their role in managing investments. Unlike standard management fees, which are typically a fixed percentage of assets under management, carried interest is contingent on the fund’s performance. This performance-based reward is designed to align the interests of fund managers with those of the investors by tying compensation to the success of the investment.

• Performance-Based Compensation: Carried interest is earned only if the fund exceeds a predetermined performance threshold, often called a hurdle rate. This means that fund managers are rewarded based on the fund’s success, incentivizing them to maximize returns.
• Profit Sharing: After the fund surpasses the hurdle rate, the remaining profits are shared between the investors and the fund managers. The share allocated to managers is known as carried interest and is usually a percentage of the profits.
• Alignment of Interests: By linking compensation to performance, carried interest ensures that fund managers are motivated to achieve high returns, benefiting both themselves and the investors. This alignment helps in fostering a performance-driven culture within the fund.

Historical Background and Evolution

The concept of carried interest has evolved significantly since its inception, shaped by changing financial practices, regulatory adjustments, and broader economic trends.

Early Developments:

• Origins in Private Equity: Carried interest originated in the private equity industry as a way to compensate fund managers for successfully managing investments and generating high returns. The model was designed to reward managers based on their ability to create value for investors.
• Growth in Popularity: Over the years, carried interest became a standard component in private equity and hedge fund compensation structures. Its popularity grew as it proved effective in aligning the interests of fund managers with those of investors, encouraging performance-based management.

Recent Changes:

• Regulatory Scrutiny: In recent decades, carried interest has come under increased scrutiny, particularly concerning its tax treatment. Debates over whether carried interest should be taxed as capital gains or ordinary income have led to numerous legislative proposals and reforms aimed at addressing perceived inequities.
• Global Adoption: While initially confined to the private equity and hedge fund sectors, the concept of carried interest has been adopted more broadly, including in venture capital and real estate investments. The model has become a common feature in various investment industries due to its effectiveness in incentivizing performance.

Importance in Private Equity and Hedge Funds

Carried interest plays a crucial role in the private equity and hedge fund industries, serving as a key element in compensation structures and performance management.

• Incentivizes Fund Managers: Carried interest aligns fund managers’ interests with those of investors by tying their compensation to the fund’s performance. This performance-based reward motivates managers to achieve the highest possible returns, benefiting both themselves and the investors.
• Attracts Top Talent: The potential for significant earnings through carried interest makes it an attractive component of compensation packages. This helps private equity and hedge funds attract and retain experienced managers who can drive fund performance.
• Encourages High Performance: By linking compensation to the success of the investments, carried interest fosters a culture of high performance. Managers are incentivized to pursue profitable opportunities and maximize returns, contributing to the overall success of the fund.
• Aligns Long-Term Goals: Carried interest typically involves a long-term perspective, as managers often earn their share of profits after several years. This alignment with long-term investment goals ensures that managers are focused on sustainable growth and value creation.
• Enhances Investor Confidence: When fund managers have a stake in the fund’s success through carried interest, it enhances investor confidence. Investors are reassured that managers are committed to achieving strong performance and sharing in the rewards, which can lead to more successful and fruitful investment partnerships.

How Carried Interest Works

Understanding carried interest involves delving into its structure and mechanics, calculating it accurately, and examining real-world examples. Here’s an in-depth look at each aspect.

Structure and Mechanics of Carried Interest

Carried interest is a performance-based compensation mechanism used primarily in private equity and hedge funds. It is designed to align the interests of fund managers with those of investors by tying the managers’ rewards to the success of the fund.

Key Components:

• Hurdle Rate: This is the minimum return that must be achieved before fund managers are entitled to receive carried interest. It ensures that investors get their initial capital back plus a minimum return before managers start earning their share of the profits.
• Catch-Up Provision: Once the hurdle rate is met, fund managers often receive a larger percentage of profits until they “catch up” to the agreed-upon carried interest rate. This provision allows managers to earn their full carried interest more quickly after the hurdle is surpassed.
• Carried Interest Percentage: After the hurdle rate and catch-up provisions are satisfied, the remaining profits are divided between the fund managers and investors based on a pre-agreed percentage. The carried interest percentage typically ranges from 15% to 30% of the profits.

Example Structure:

Imagine a fund with a total capital commitment of $100 million. The hurdle rate is set at 8%, meaning the fund must return at least $108 million before the managers are entitled to any carried interest. The carried interest percentage is set at 20% of the profits above this threshold.

Calculation of Carried Interest

Calculating carried interest involves a few straightforward steps but requires careful consideration of the fund’s performance and the agreed-upon terms. Here’s how to calculate it:

Steps to Calculate Carried Interest:

1. Determine Total Profits: Subtract the total capital invested from the total returns of the fund. This gives you the total profits.
2. Calculate Excess Profits Above the Hurdle Rate: Subtract the hurdle rate return from the total profits. The hurdle rate return is calculated as the initial investment multiplied by the hurdle rate percentage.
3. Apply the Carried Interest Percentage: Multiply the excess profits by the carried interest percentage to determine the amount due to fund managers.

Formula for Calculating Carried Interest:

1. Total Profits = Total Returns – Total Investment
2. Excess Profits = Total Profits – (Investment * Hurdle Rate)
3. Carried Interest = Excess Profits * Carried Interest Percentage

Example Calculation:

• Total Investment: $100 million
• Total Returns: $130 million
• Hurdle Rate (8%): $8 million (calculated as $100 million * 8%)
• Excess Profits: $130 million – $100 million – $8 million = $22 million
• Carried Interest Percentage (20%): $22 million * 20% = $4.4 million

So, the fund managers would earn $4.4 million in carried interest.

Example Scenarios

Exploring different scenarios can help you better understand how carried interest plays out in practice. Here are two distinct examples:

Scenario 1: High-Performing Fund

• Initial Investment: $50 million
• Total Returns: $75 million
• Hurdle Rate (8%): $4 million (calculated as $50 million * 8%)
• Total Profits: $75 million – $50 million = $25 million
• Excess Profits: $25 million – $4 million = $21 million
• Carried Interest Percentage (20%): $21 million * 20% = $4.2 million

In this scenario, the fund managers receive $4.2 million in carried interest.

Scenario 2: Underperforming Fund

• Initial Investment: $100 million
• Total Returns: $105 million
• Hurdle Rate (8%): $8 million (calculated as $100 million * 8%)
• Total Profits: $105 million – $100 million = $5 million
• Excess Profits: $5 million – $8 million = -$3 million

Since the fund did not surpass the hurdle rate, no carried interest is earned by the managers.

These scenarios illustrate how the performance of a fund and the terms of the carried interest arrangement impact the compensation received by fund managers. By understanding these dynamics, you can better appreciate how carried interest functions in various investment environments.

Examples of Carried Interest

To fully grasp the concept of carried interest, it’s helpful to look at practical examples. These examples illustrate how carried interest works in various scenarios and highlight its impact on fund managers and investors. By examining real-world situations, you can see how carried interest affects compensation and investment outcomes.

Example 1: Private Equity Fund

Imagine a private equity fund with a $100 million investment pool. The fund has a hurdle rate of 8%, meaning that the fund must generate at least an 8% return before carried interest kicks in. The fund’s structure includes a 20% carried interest for the managers, with profits distributed after meeting the hurdle rate.

Scenario:

• Fund Performance: The fund generates a total return of 15%, which translates to $15 million in profits.
• Hurdle Rate: The 8% hurdle rate on $100 million is $8 million. Since the fund’s profits exceed this hurdle, carried interest applies to the excess.
• Profit Distribution: The total profit of $15 million minus the $8 million hurdle rate leaves $7 million available for carried interest.
• Carried Interest Calculation: The fund managers are entitled to 20% of the $7 million excess profit. Thus, the carried interest amount is $1.4 million.
• Investor Returns: Investors receive the initial $100 million plus the remaining profit of $5.6 million ($7 million minus $1.4 million carried interest).

Outcome:

In this scenario, the fund managers earn $1.4 million through carried interest, while the investors benefit from the remaining $5.6 million in profits.

Example 2: Hedge Fund

Consider a hedge fund with $500 million in assets and a performance fee structure that includes a 2% management fee and a 20% carried interest. The fund achieves a net return of 10% for the year.

Scenario:

• Fund Performance: The fund generates $50 million in returns (10% of $500 million).
• Management Fee: The fund collects a management fee of $10 million (2% of $500 million).
• Net Profit: After the management fee, the net profit is $40 million ($50 million – $10 million).
• Carried Interest Calculation: The carried interest is applied to the net profit. The managers receive 20% of the $40 million, which amounts to $8 million.

Outcome:

The hedge fund managers earn $8 million in carried interest, and investors receive the remaining $32 million ($40 million – $8 million) in net profit.

Example 3: Real Estate Investment Fund

Suppose a real estate investment fund with $200 million in assets invests in commercial properties. The fund has a carried interest structure where the managers receive 25% of profits exceeding a 10% annual return.

Scenario:

• Fund Performance: The fund generates a return of 12% on the $200 million, totaling $24 million in profits.
• Hurdle Rate: The 10% hurdle rate on $200 million is $20 million. The carried interest applies to the excess profit beyond this amount.
• Excess Profit: The excess profit is $4 million ($24 million – $20 million).
• Carried Interest Calculation: The managers receive 25% of the $4 million excess, equating to $1 million.

Outcome:

In this case, the fund managers receive $1 million as carried interest, while the remaining $23 million ($24 million – $1 million) is distributed to investors.

These examples illustrate how carried interest is calculated and distributed in different types of funds. By understanding these scenarios, you can better appreciate how carried interest functions in practice and its implications for both fund managers and investors.

Tax Implications and Legal Considerations

Carried interest isn’t just a financial mechanism; it also carries significant tax implications and legal considerations. Understanding these aspects is crucial for both fund managers and investors as they navigate the complexities of investment compensation.

Tax Treatment of Carried Interest

The tax treatment of carried interest has been a subject of considerable debate. Generally, carried interest is taxed at capital gains rates rather than ordinary income rates. This treatment is based on the premise that carried interest represents a share of profits from investments, similar to capital gains, rather than a straightforward salary or wage.

• Capital Gains Tax Rate: In many jurisdictions, carried interest is taxed at a lower rate than ordinary income. For instance, in the United States, long-term capital gains tax rates apply to carried interest, which can be significantly lower than ordinary income tax rates.
• Tax Deferral: Fund managers often benefit from deferral of taxes on their carried interest until the profits are realized. This means that tax obligations are postponed until the fund generates returns, potentially allowing managers to benefit from investment growth over time.
• Criticism and Controversy: Critics argue that the preferential tax treatment of carried interest is unfair, as it allows fund managers to pay lower tax rates compared to other workers who earn ordinary income. This has sparked calls for reform to tax carried interest at ordinary income rates.

Recent Legislative Changes and Proposals

Recent years have seen various legislative proposals aimed at altering how carried interest is taxed. These changes could have significant implications for fund managers and the overall financial landscape.

• Proposed Tax Reforms: Several legislative proposals have aimed to change the tax treatment of carried interest. For example, some proposals suggest taxing carried interest as ordinary income rather than at capital gains rates, which could result in higher tax liabilities for fund managers.
• Bipartisan Efforts: Tax reform discussions have included bipartisan efforts to address perceived inequities in the tax treatment of carried interest. These efforts often focus on increasing transparency and ensuring that tax rates align more closely with the economic reality of the compensation received.
• Impact of Changes: If implemented, these legislative changes could impact the attractiveness of the carried interest model and alter how fund managers structure their compensation. It could also influence investor decisions and the overall dynamics of private equity and hedge funds.

Legal Framework and Regulatory Oversight

The legal framework and regulatory oversight surrounding carried interest ensure compliance and transparency in fund management. Understanding these regulations helps maintain proper adherence and avoid legal pitfalls.

• Securities and Exchange Commission (SEC) Rules: The SEC oversees fund management practices, including the reporting and disclosure of carried interest. Regulations require funds to provide clear information about management fees, carried interest, and performance.
• Internal Revenue Service (IRS) Guidelines: The IRS provides guidelines on how carried interest should be reported for tax purposes. Compliance with these guidelines ensures that fund managers and investors meet their tax obligations.
• Regulatory Developments: Ongoing regulatory developments may introduce new requirements or adjustments to existing rules. Staying informed about these changes helps fund managers and investors navigate the evolving regulatory landscape effectively.

Carried Interest Impact on Investors and Fund Managers

The carried interest model has profound effects on both fund managers and investors. By understanding these impacts, you can better appreciate how carried interest shapes investment outcomes and compensation strategies.

Benefits to Fund Managers

Carried interest provides several key benefits to fund managers, making it a popular compensation structure in private equity and hedge funds.

• Performance Incentive: Carried interest aligns the interests of fund managers with those of investors. Managers are motivated to achieve higher returns because their compensation is directly tied to the fund’s performance.
• Potential for High Earnings: With a successful fund, managers can earn substantial amounts through carried interest. This potential for high earnings makes it an attractive component of compensation, especially in high-performing funds.
• Alignment with Investor Goals: By tying compensation to investment performance, carried interest ensures that fund managers are focused on achieving the best possible outcomes for investors. This alignment helps build trust and fosters a performance-driven culture.

Implications for Investors

For investors, carried interest impacts both the potential returns and the overall structure of their investments. Understanding these implications can help in evaluating fund managers and making informed investment decisions.

• Alignment of Interests: Carried interest ensures that fund managers are motivated to maximize returns. This alignment benefits investors by encouraging managers to focus on achieving superior performance.
• Impact on Fees: Carried interest is typically paid out of the fund’s profits, which means it is contingent on achieving returns beyond the hurdle rate. This structure can affect overall returns, but it also ensures that fees are performance-based.
• Transparency and Disclosure: Investors should seek transparency regarding how carried interest is calculated and reported. Clear disclosure helps investors understand how their capital is being managed and how compensation is structured.

Comparative Analysis with Other Compensation Models

Comparing carried interest with other compensation models can provide insight into its advantages and limitations relative to other approaches.

• Flat Management Fees: Unlike carried interest, flat management fees are a fixed percentage of assets under management (AUM). While predictable, flat fees do not incentivize fund managers to outperform, as their compensation remains constant regardless of fund performance.
• Profit-Sharing Arrangements: Profit-sharing models can resemble carried interest but may differ in terms of structure and percentage. Profit-sharing often involves distributing a portion of profits to employees or partners, potentially offering more flexibility compared to traditional carried interest.
• Performance Fees: Similar to carried interest, performance fees are based on achieving specific performance targets. However, performance fees can vary widely in structure, including different benchmarks and performance thresholds.

By understanding these compensation models, you can better evaluate their suitability for different investment strategies and fund management approaches. Each model has its advantages and drawbacks, and the choice of compensation structure can significantly impact both fund performance and manager incentives.

Controversies and Debates

Carried interest has long been a topic of controversy and debate, reflecting broader discussions about fairness, tax policy, and economic incentives. Exploring these controversies provides a nuanced understanding of the issues surrounding carried interest.

Arguments For and Against Carried Interest

The debate over carried interest is marked by passionate arguments on both sides, each presenting compelling points about its merits and drawbacks.

Arguments For Carried Interest:

• Performance Incentive: Proponents argue that carried interest aligns the interests of fund managers with those of investors. By tying compensation to the fund’s performance, managers are motivated to maximize returns, benefiting both parties.
• Economic Efficiency: Supporters claim that carried interest encourages investment in high-risk, high-reward projects. This performance-based compensation structure can drive economic growth by incentivizing managers to pursue opportunities that might otherwise be overlooked.
• Industry Standard: Carried interest has been a longstanding component of fund management compensation. It’s viewed by many as a necessary tool to attract and retain top talent in a competitive industry, ensuring that experienced managers are motivated to deliver strong performance.

Arguments Against Carried Interest:

• Tax Inequality: Critics argue that the preferential tax treatment of carried interest—taxed as capital gains rather than ordinary income—creates an unfair disparity between fund managers and ordinary workers. This tax break is seen as a form of economic favoritism that exacerbates income inequality.
• Lack of Transparency: There are concerns that carried interest arrangements can be opaque, making it difficult for investors to fully understand how their money is being managed and how compensation is structured. This lack of transparency can undermine trust between fund managers and investors.
• Potential for Excessive Risk-Taking: By focusing on performance-based rewards, carried interest might encourage fund managers to take excessive risks to achieve higher returns. This risk-taking can sometimes lead to instability and losses, potentially harming both investors and the broader financial system.

Public Perception and Media Coverage

Public perception and media coverage of carried interest often reflect broader societal attitudes toward wealth, fairness, and tax policy. How carried interest is portrayed can influence public opinion and policy discussions.

Media Coverage:

• Focus on Tax Advantages: Media reports frequently highlight the tax advantages associated with carried interest, emphasizing the disparity between capital gains and ordinary income tax rates. This coverage often fuels debates about tax fairness and calls for reform.
• Impact on Income Inequality: Coverage also addresses how the carried interest tax treatment contributes to income inequality. By focusing on the high earnings of fund managers, media outlets explore how this compensation model exacerbates wealth gaps.
• Reform Proposals: Media discussions often feature proposed legislative changes aimed at altering the tax treatment of carried interest. This coverage can shape public opinion and influence legislative priorities by presenting different viewpoints on potential reforms.

Public Opinion:

• Perceived Unfairness: Many people view the tax treatment of carried interest as unfair, particularly when compared to the tax rates applied to ordinary income. Public sentiment often reflects a desire for more equitable tax policies.
• Support for Reform: There is significant public support for reforming how carried interest is taxed. This support is driven by concerns about income inequality and the desire for a more just tax system that addresses perceived disparities.

Key Figures and Their Stances

Various influential figures and organizations have weighed in on the issue of carried interest, shaping the debate through their public statements and policy proposals.

Political Figures:

• Legislators: Some lawmakers advocate for changing the tax treatment of carried interest to align it with ordinary income tax rates. These legislators argue that such reforms are necessary to address tax fairness and reduce income inequality.
• Policy Advocates: Policy advocates and think tanks often contribute to the debate by providing research and analysis on the impacts of carried interest. Their work helps inform policymakers and the public about the potential effects of different tax treatment approaches.

Industry Leaders:

• Fund Managers: Industry leaders and fund managers generally support the current carried interest model, citing its effectiveness in aligning interests and driving performance. They often argue against proposed reforms, emphasizing the potential negative impacts on investment and fund management.
• Trade Associations: Organizations representing the investment industry may take stances on carried interest based on their members’ interests. These associations often provide arguments for maintaining the status quo or moderating proposed reforms.

Global Perspectives

The treatment of carried interest varies widely across different countries, reflecting diverse regulatory approaches and economic contexts. Understanding these global perspectives can offer valuable insights into how carried interest is managed around the world.

International Practices and Regulations

Different countries have adopted various practices and regulations regarding carried interest, reflecting their unique economic environments and policy priorities.

United Kingdom:

• Tax Treatment: In the UK, carried interest is typically taxed as capital gains, similar to the U.S. model. However, recent debates have considered aligning it more closely with ordinary income tax rates.
• Regulatory Oversight: The UK Financial Conduct Authority (FCA) regulates fund management practices, including the disclosure of carried interest arrangements. Transparency requirements ensure that investors are informed about compensation structures.

European Union:

• Varied Approaches: The EU member states have different approaches to taxing carried interest. Some countries tax it as capital gains, while others are exploring or have implemented reforms to treat it as ordinary income.
• Regulatory Harmonization: The EU is working towards greater regulatory harmonization in financial markets, which may impact how carried interest is treated across member states.

Asia-Pacific Region:

• Emerging Regulations: In the Asia-Pacific region, regulations and tax treatments for carried interest are evolving. Countries like Australia and Singapore are developing frameworks to address the compensation model in light of their unique economic contexts.

Comparative Analysis: U.S. vs. Other Countries

Comparing how carried interest is treated in the U.S. with other countries provides insights into different regulatory and tax approaches.

Tax Treatment Comparison:

• U.S.: In the U.S., carried interest is generally taxed as capital gains, leading to lower tax rates for fund managers. This treatment is a major point of contention in tax reform discussions.
• UK and EU: While similar to the U.S. in terms of capital gains treatment, the UK and EU countries are exploring or have implemented reforms that may alter how carried interest is taxed, potentially aligning it more closely with ordinary income.
• Asia-Pacific: The treatment of carried interest in the Asia-Pacific region varies, with some countries adopting capital gains treatment and others considering reforms to address tax fairness and regulatory consistency.

Regulatory Differences:

• Disclosure Requirements: Different countries have varying levels of disclosure and transparency requirements regarding carried interest. The U.S. and UK, for example, have robust disclosure rules, while other regions may have less stringent requirements.
• Compliance and Enforcement: The level of regulatory oversight and enforcement can differ, impacting how carried interest is managed and reported. Countries with stricter regulations may have more comprehensive compliance requirements for fund managers.

Trends and Future Outlook

The future of carried interest is likely to be shaped by ongoing legislative changes, global regulatory developments, and evolving economic conditions.

Legislative Trends:

• Reform Proposals: Continued debate and legislative proposals in various countries may lead to significant changes in how carried interest is taxed and regulated. This could involve aligning carried interest with ordinary income tax rates or implementing new disclosure requirements.
• International Harmonization: Efforts towards greater international harmonization in financial regulations could influence the treatment of carried interest, potentially leading to more consistent practices across different jurisdictions.

Market Trends:

• Impact on Fund Management: Changes in carried interest regulations may affect fund management practices, influencing how funds are structured and how managers are compensated. This could impact investor relations and overall market dynamics.
• Investor Preferences: Evolving regulations and public sentiment may influence investor preferences and expectations. Investors may increasingly demand greater transparency and fairness in compensation models, shaping how fund managers structure their fees.

By understanding these trends and global perspectives, you can gain a comprehensive view of the future landscape of carried interest and its implications for both fund managers and investors.

Best Practices for Managing Carried Interest

Successfully managing carried interest requires careful attention to several best practices. These practices ensure compliance, align interests, and maximize the benefits of the carried interest model for both fund managers and investors.

• Clear and Transparent Agreements: Draft detailed and transparent agreements outlining the terms of carried interest, including hurdle rates, catch-up provisions, and the carried interest percentage. Ensure that all parties fully understand these terms to avoid misunderstandings and disputes.
• Regular Performance Tracking: Implement robust systems for tracking fund performance against benchmarks and hurdle rates. Regular monitoring helps ensure that carried interest calculations are accurate and timely, maintaining investor confidence and satisfaction.
• Compliance with Regulations: Stay up-to-date with relevant regulations and tax laws governing carried interest in your jurisdiction. Ensure that all disclosures and reporting requirements are met to avoid legal and financial complications.
• Effective Communication: Maintain open communication with investors about how carried interest is structured and calculated. Providing regular updates and transparency helps build trust and ensures that investors are well-informed about their investments.
• Periodic Reviews: Conduct periodic reviews of carried interest arrangements to ensure they remain competitive and aligned with industry standards. Adjustments may be necessary based on changes in market conditions, regulatory requirements, or fund performance.
• Risk Management: Assess and manage the risks associated with performance-based compensation. Implement strategies to mitigate the potential for excessive risk-taking that could jeopardize the fund’s performance and, consequently, the carried interest.
• Ethical Considerations: Adhere to ethical standards in managing carried interest. Ensure that the compensation structure does not incentivize managers to engage in behavior that could harm the fund or investors, such as taking undue risks or engaging in conflicts of interest.

By adhering to these best practices, you can effectively manage carried interest, ensuring it serves as a fair and motivating compensation model while maintaining compliance and fostering positive relationships with investors.

Conclusion

Understanding carried interest is crucial for anyone involved in private equity or hedge funds. It’s not just a financial term; it’s a key element that shapes how fund managers are compensated and how investments are managed. By linking compensation to fund performance, carried interest ensures that managers are incentivized to deliver strong returns, which ultimately benefits investors. Whether you’re a fund manager or an investor, knowing the ins and outs of carried interest helps you navigate the complexities of fund compensation and make more informed decisions about your investments.

As discussions around carried interest continue to evolve, staying informed about its tax implications, legal considerations, and global practices is essential. This guide has covered the fundamentals, provided insights into the debates surrounding carried interest, and explored how it impacts both fund managers and investors. Keeping up with these aspects will help you better understand the dynamics of the investment world and the role carried interest plays in driving performance and aligning interests.