As carried interest dwindles, private equity professionals want this instead

Carried interest is so 2016. Now that carry is a lot lower than before and stands to be taxed as income in the UK, the real money in private equity (PE) is to be made from something else. If you want to make the big money these days, you need equity in the general partnership instead. 

Get Morning Coffee ☕ in your inbox. Sign up here.

"In absolute terms, it's clearly harder to earn a lot of carried interest in private equity now," says Rupert Bell at recruitment firm Private Equity Recruitment (PER). "The level of competition for deals has gone through the roof and the three drivers for how private equity firms make money - favourable entry multiples, a change in the profit stream and deleveraging, have all become harder to achieve. Improving the operating model is now paramount."

Carried interest is paid to senior employees, but only once a private equity firms exits its investments and makes a profit above a preordained hurdle rate, of circa 8% or above. However, with private equity exits at a five-year low according to S&P, carried interest is harder than ever to achieve. 'Realized performance compensation' in Blackstone's private equity division was, for example, negative $400m in the second quarter of 2024. By comparison, in the pre-pandemic first quarter of 2019, Blackstone achieved $3.7bn of realizations in the same segment.

Even if private equity professionals do somehow manage to earn a pale shadow of the carried interest paid in the past, more is likely to disappear in tax. As we noted earlier this month, the new UK government expects to levy additional tax of £188k per carried interest recipient by taxing the gain as income, at 45%, instead of capital gains, at 28%. 

In the circumstances, one insider says the appeal of carried interest is dwindling. Instead of carried interest, senior people in private equity are there for the equity in the general partnership. This can be very lucrative. Even better, it will continue to be taxed as a capital gain. 

The riches to be made from owning equity in the general partnership are exemplified by Donald Mackenzie, the co-founder of CVC Capital Partners, who made €900m earlier this year when it was floated for €14bn on the Amsterdam stock exchange.  Mackenzie is the owner of a super yacht, a fleet of racing cars, and a collection of luxury properties, including a grade I listed mansion in Dorset, a grand home in Hampshire and a residence in Kensington, according to the Times. 

CVC isn't the only fund to recently enrich its equity holders. - In May, IK Partners, a European midmarket private equity firm announced the sale of a 50% stake to Wendel, a French investment firm, for €383m. Ik's equity holders, including CEO Christopher Masek, are not quite in Mackenzie's league, but are doing better than everyone with underwater carry. 

Even if equity in a private equity firm isn't sold, the equity owners can make money from dividends.

The only problem with equity in the general partnership as opposed to carried interest paid on successfully exited investments is that by definition, very few people can receive it. As a result, insiders say there's a new group of haves and have-nots in PE. "There's a new tension, particularly for rising stars," says one. "Either you have equity in the GP and are making money from dividends and waiting for a potential sale, or you haven't." People who only have carried interest are effectively itinerant job hoppers, say some insiders; loyalty to particular firms is dwindling.

None of this particularly matters if you're a private equity junior or a banker trying to break into the industry. - At junior levels you won't even get carried interest, let alone equity. 

Bell says PE's travails aren't dissuading young bankers from moving to the industry, but they are somewhat changing their approach. Now that private equity is a mature sector, he says people enter it for reasons other than money. "People recognize that PE is still very well paid, but they want to work in the industry for reasons like having influence over investment decisions and implementing change. Culture has become increasingly important as well." 

Have a confidential story, tip, or comment you’d like to share? Contact: +44 7537 182250 (SMS, Whatsapp or voicemail). Telegram: @SarahButcher. Click here to fill in our anonymous form, or email editortips@efinancialcareers.com. Signal also available.

Bear with us if you leave a comment at the bottom of this article: all our comments are moderated by human beings. Sometimes these humans might be asleep, or away from their desks, so it may take a while for your comment to appear. Eventually it will – unless it’s offensive or libelous (in which case it won’t.)