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Carried interest in private equity? KKR just explained exactly how it works

If you want to work in private equity, you will want to receive carried interest. As the recent Heidrick & Struggles private equity compensation survey made clear, it's the carried interest that counts. It's also the carried interest that funds like KKR and Apollo are embracing as they seek to cut compensation costs align pay to investors' needs. 

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If you want to understand how carried interest works, KKR has just released a helpful explainer as part of its guide to careers in private equity. Carried interest is not a given; certain things have to be achieved first.

In the hypothetical example from KKR below, that thing is an 8% return when investments are exited. Beyond that point, senior people at the fund start to receive carried interest ('carry').

However, the amount of carry paid out isn't great to begin with. In its hypothetical example, KKR says only 2% of profits are paid out as carry until the "full catch-up" is met. It doesn't say which level of return this amounts to, but beyond that point, employees at the fund receive 20% of the profits instead. 

If you work for KKR, you therefore want to be on a fund that's somewhere on the far right of the diagram. Unfortunately, that may not be the case right now - when Blackstone released its annual results yesterday it said carried interest paid to employees fell 51% last year. In the real estate team specifically carried interest was down 89%. 

In KKR's example, carried interest is only paid to partners at the fund. In fact, Heidrick & Struggles says it can be paid at associate level and above.

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AUTHORSarah Butcher Global Editor

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