New research from Ludovic Phalippou, a professor at the University of Oxford’s Saïd Business School, attempts to measure the scale of private equity carried interest over the past two decades. Based on available fund performance data from Preqin, Phalippou estimates private markets investors have generated more than $1 trillion in total carry, including unrealized amounts, since 2000.
It should be noted that the paper relies on an array of assumptions as a means to bridge gaps in the data, so its findings may be more directional than precise. Even so, the work provides some interesting takeaways.
Unsurprisingly, the data show carry disproportionately accruing to a relatively small number of the largest U.S.-based private equity firms, with some representation from a handful of European rivals.
TVPI on a consolidated basis was shown to be 1.6 times, or, in other words, funds returned $1.60 to their limited partners for every dollar invested. Interestingly, TVPI metrics were relatively similar among the sampling of firms. This fact, notes Phalippou, implies that differences in carry across firms are more likely to reflect differences in the amount of capital under management than performance. Backing up the point, Phalippou found the correlation between carry and either TVPI or IRR was zero.
Other notable cases of uniformity across firms were the carry rate and hurdle rate. Nearly all strategies had 25th and 75th percentile carry rates of 20 percent, excluding only fund of funds, secondaries, and private debt. Most hurdle rates were 8 percent, save for some lower hurdles within various credit and real assets strategies.
But, rather than a granular breakdown of fund performance detail, Phalippou says the real purpose of his research (titled The Trillion Dollar Bonus of Private Capital Fund Managers) is to highlight the magnitude of carried interest and show policymakers the taxable opportunity it provides—should it be reclassified from the lowest possible long-term capital gains rates to the meaningfully higher tax rates on earned income.
In the US, each of the three most recent administrations has targeted carried interest as part of their tax reform agendas, but despite some scares in recent years, all efforts ultimately failed.
Pressure remains high in the UK, where the Labour Party has pledged to close what they call an "absurd" loophole by taxing carried interest at the highest income tax rate of 45 percent—a move that, according to shadow chancellor Rachel Reeves, could increase industry taxes by nearly £440 million per year.