A “carried interest” in a private equity fund or hedge fund (often referred to simply as “carry”) represents the fund manager’s stake in the profits of the fund. This stake is often between 15% and 44% of profits.
Placing a value on carried interest is very difficult, but a prudent valuation is needed for tax purposes if the carry has been transferred as part of an estate-planning strategy.
Because carried interest can increase dramatically in value in a short time, it can be viewed as a “leveraged” asset with significant potential for gifting.
A carried interest can increase sharply in value when it is initially valued at or before inception of the fund, yet it is difficult to place a value on the interest at that point. Any valuation must consider the potential for future profits. However, at such early stages of the fund, profits are often just theoretical and have substantially lower values than after the fund managers have proved their abilities.
Fund structures are often complex and the myriad of valuation issues that need to be considered can be overwhelming. If inexperienced analysts miss important issues, transactions may be delayed and the risk of an audit will increase.
Pluris Valuation Advisors’ professionals have significant experience with complex fund structures. We have expertise in how to value interests in carry vehicles, plus other entities in the typical hedge fund or private-equity fund structure, such as management entities, the funds themselves, waiver entities and control vehicles.
For more information on our valuations of carried interest, contact Pluris today.