--- title: Carried Interest Definition | Promoted Equity description: Carried interest, also known as promoted equity, is a share of the profits of an investment or investment fund that is paid to the investment manager as compensation. image: https://www.realized1031.com/hubfs/social-suggested-images/Realized_Glossary_Graphic-3.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # Promoted Equity (Carried Interest) Promoted equity (carried interest) is a share of the profits of an investment or investment fund that is paid to the investment manager as compensation. It is given in exchange for creating value or bearing a disproportionate share of downside risk. By way of a simple example, assume a limited partnership is formed to acquire a $5,000,000 industrial property and is capitalized with a $3,500,000 mortgage and the $1,500,000 balance from equity. The partnership may be structured such that the limited partners contribute 90% of the equity or $1,350,000 and the general partner or [sponsor](https://www.realized1031.com/glossary/sponsor) contributes the remaining 10% or $150,000. Terms of the partnership may call for the limited partners to receive an 8.0% preferred return, followed by a 70/30 split of all cash flow in favor of the limited partners. If the property produces [cash flow](https://www.realized1031.com/glossary/cash-flow) of $180,000, resulting in a [cash-on-cash return](https://www.realized1031.com/glossary/cash-on-cash-return) of 12.0%, the cash flow distribution may be calculated as follows: $108,000 to the limited partners which is equal to an 8.0% return on their investment of $1,350,000. The remaining $72,000 of cash flow would be distributed 70% to the limited partners ($50,400) and 30% to the general partner ($21,600). In aggregate, the limited partners have received $158,400 which equates to an 11.7% cash-on-cash return for the limited partners while the general partner receives $21,600 which equates to a 16.0% cash-on-cash return on their investment of $150,000. In this case, the general partner has received 12.0% of the cash flow despite investing only 10% of the equity. However, the general partner did not receive any cash flow until after the limited partner had received a preferred return. 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By way of a simple example, assume a limited partnership is formed to acquire a $5,000,000 industrial property and is capitalized with a $3,500,000 mortgage and the $1,500,000 balance from equity. The partnership may be structured such that the limited partners contribute 90% of the equity or $1,350,000 and the general partner or sponsor contributes the remaining 10% or $150,000. Terms of the partnership may call for the limited partners to receive an 8.0% preferred return, followed by a 70/30 split of all cash flow in favor of the limited partners. If the property produces cash flow of $180,000, resulting in a cash-on-cash return of 12.0%, the cash flow distribution may be calculated as follows: $108,000 to the limited partners which is equal to an 8.0% return on their investment of $1,350,000. The remaining $72,000 of cash flow would be distributed 70% to the limited partners ($50,400) and 30% to the general partner ($21,600). In aggregate, the limited partners have received $158,400 which equates to an 11.7% cash-on-cash return for the limited partners while the general partner receives $21,600 which equates to a 16.0% cash-on-cash return on their investment of $150,000. In this case, the general partner has received 12.0% of the cash flow despite investing only 10% of the equity. However, the general partner did not receive any cash flow until after the limited partner had received a preferred return. Note that this is a simplified example and that such “waterfall” distribution structures can take many forms and involve complex models and operating agreements.", "author" : { "@type" : "Organization", "email" : "marketing@realized1031.com", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2022-06-20T16:54:58+0000", "datePublished" : "2022-06-20T16:54:58+0000", "description" : "Carried interest, also known as promoted equity, is a share of the profits of an investment or investment fund that is paid to the investment manager as compensation. 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