One of the most powerful concepts in AIFs is the “carried interest,” also known as the performance fee. It’s a share of the fund’s profits that the fund manager receives, but with a critical condition: it’s only paid *after* the investors have received their entire initial investment back, plus a pre-agreed minimum return (the “hurdle rate”).
Typically, this is structured as “2 and 20,” meaning a 2% management fee and a 20% share of the profits. This model creates a powerful alignment of interests. The fund manager only makes significant money if the investors make significant money first. It incentivizes performance and ensures the manager is focused on delivering substantial returns, not just collecting fees.
