Carry roll in Continuation Fund?

Based on the most helpful WSO content, the concept of carry rolling over into a continuation fund isn't directly addressed in the provided context. However, I can infer some principles related to carry and its general treatment that might shed light on your question.

Carry, or carried interest, is a share of the profits that investment professionals receive from the funds they manage. It's typically awarded as an incentive and is contingent upon the fund achieving a certain level of performance. The carry can be subject to various vesting schedules and conditions, including employment status with the firm and the achievement of certain benchmarks.

In the context of a continuation fund, which is often used to hold investments longer than the original fund term allows, the treatment of accrued carry would likely depend on the specific agreements made at the time the continuation fund is established. These details are usually negotiated among the fund managers (General Partners or GPs), the limited partners (LPs), and possibly the professionals entitled to carry.

1. Accrued Carry Rollover: If carry is accrued in the original fund and is then rolled over into a continuation fund, the specifics of how this is treated would depend on the agreement terms. It could potentially be treated as at-risk capital if the professionals are required to reinvest it into the continuation fund, thus exposing it to the risk of loss based on the performance of the new fund's investments.

2. Conversion to GP Commitment: Alternatively, the rolled-over carry could be converted into a form of GP commitment, where it might not be directly at risk of loss in the same way. This would mean that the carry is treated more like an investment made by the GP, potentially with different risk and reward characteristics compared to the original carry arrangement.

3. Risk of Loss: Whether the rolled-over carry is at risk of loss would depend on how it's structured in the continuation fund. If it's treated as at-risk capital, then yes, there would be a risk of loss. If it's converted into a GP commitment or similar, the specifics of the agreement would dictate the risk exposure.

In practice, the details of how carry is treated in the context of a continuation fund would be highly specific to the agreements made between the GPs, LPs, and other stakeholders. It's a complex area that would likely require negotiation and legal structuring to ensure that all parties' interests are aligned and protected.

Sources: Confused about carry at PE Fund, How do carry dollars at work translate into annual compensation?, Carry in REPE, Q&A: European PE professional at a Large-cap Megafund, Actually Realizing Carry