Limited Partnership Agreement Carried Interest: Understanding the Basics
If you`re considering forming a limited partnership agreement, you may have heard the term “carried interest” thrown around. But what exactly does it mean, and how does it affect your partnership?
Carried interest is a type of profit-sharing arrangement commonly used in the private equity and hedge fund industries. Essentially, it`s a share of the profits that the general partner (GP) earns for managing the partnership`s investments. The term “carried interest” refers to the fact that this share is often carried, or taken, by the GP as a form of compensation.
In a limited partnership agreement, the GP is typically responsible for managing the partnership`s investments and making decisions about how to allocate the partnership`s assets. The limited partners (LPs), on the other hand, provide the capital but have no say in the day-to-day operations of the partnership.
Under a carried interest arrangement, the GP receives a share of the profits generated by the partnership`s investments, usually around 20%. This share of profits is separate from the management fee that the GP charges for its services, which is typically around 2% of the partnership`s assets under management.
The idea behind carried interest is that it aligns the interests of the GP and the LPs. Because the GP stands to benefit financially from the partnership`s success, it has an incentive to make smart investment decisions and to generate high returns. This can be particularly important in the private equity and hedge fund industries, where the GP`s expertise is often essential to the success of the partnership`s investments.
It`s important to note, however, that carried interest can be a controversial topic. Some critics argue that it allows the GP to earn an outsized share of the profits, even if the LPs are taking on most of the risk. Others argue that carried interest creates a tax loophole, as the GP`s share of the profits is often taxed as capital gains rather than ordinary income.
Despite these criticisms, carried interest remains a common feature of limited partnership agreements in the private equity and hedge fund industries. If you`re considering forming a limited partnership, it`s important to understand how carried interest works and how it might affect your partnership`s operations and finances. A qualified attorney can help you navigate these complex issues and ensure that your partnership agreement is structured in a way that meets your needs.