What Is Carried Interest Anyway?

Companies with $1 million or more in EBITDA (earnings before interest, taxes, depreciation and amortization) are considered middle market businesses (or lower middle market businesses). Middle market business are large enough to attract the interest of institutional investors (as opposed to individual investors). The most common of these are private equity firms. In a nutshell, private equity firms use investor money to buy private businesses, and sell them at a profit in the future…returning the original capital, plus a profit, to their investors. The private equity fund gets a share of the profit as their reward for making a good investment. This profit is called carried interest, and it has received some attention lately for the manner (rate) in which it is taxed. The video below does a good job in explaining carried interest. Enjoy!