Evolving incentives in private equity: The future of carried interest and co-investment

Private equity (PE) has always relied on powerful reward mechanisms to attract and retain top talent. Carried interest and co-investment have been the cornerstones of that model for decades. But the ground is shifting, and not just because of market forces. Legal and regulatory changes are reshaping how these incentives work, and for General Counsels (GCs) and senior leaders, understanding these shifts is now a strategic priority.

As someone who works closely with PE funds to build leadership teams, I see the impact every day. What used to be predictable is now a moving target. Here’s what’s changing – and why it matters.

Carried interest: shorter cycles, sharper rules

Carried interest was once synonymous with long-term lock-in. Today, firms are experimenting with shorter vesting periods and deal-by-deal structures to keep pace with a more mobile workforce. That’s good news for executives who want earlier visibility on upside, but it also means more complexity in the fine print.

Legal terms such as clawbacks, forfeiture clauses, and bad-leaver provisions are becoming standard. And with tax regimes tightening (think the UK’s decision to treat carry as income from 2026 and ongoing debates in the US) GCs need to be proactive. These aren’t just technical details; they influence where firms domicile, how deals are structured, and how competitive your platform looks to talent. For those involved in legal executive search for private equity, these nuances are now central to candidate conversations.

Co-investment: broader access, higher stakes

Co-investment has moved beyond the C-suite. More employees are being invited to participate, signalling trust and alignment. But wider access brings new challenges: governance, disclosure and risk management. Regulators are paying attention, and so should you.

Technology is helping – automated platforms make onboarding and administration easier – but legal teams still need to set clear rules around eligibility, leverage limits, and downside protection. For GCs, co-investment isn’t just a perk; it’s a governance issue that directly influences private equity compensation trends.

Beyond traditional equity

Private equity firms are no longer relying solely on carry and co-investment. Phantom equity, synthetic carry, and even GP stakes are gaining traction. These alternatives offer flexibility, but they also raise questions around tax treatment, liquidity, and optics. For legal leaders, that means negotiating bespoke structures and anticipating regulatory implications before they become roadblocks.

Why this matters now

The forces reshaping PE incentives aren’t just internal. Tax reforms, regulatory frameworks such as AIFMD II, and investor scrutiny are all driving change. Add to that the pressure of talent mobility—executives increasingly want transparency and faster value realisation—and the old “golden handcuffs” model looks outdated.

For GCs, this is more than a compliance exercise. It’s about designing reward structures that align with strategy, protect competitiveness, and stand up to regulatory scrutiny. The next wave of innovation—think tokenised co-investments and digital securities—will only make the legal dimension more critical.

What every GC should clarify before accepting a private equity role

Compensation in private equity is complex and often misunderstood. Before signing on, here are five things every GC should evaluate:

1. Understand the structure of carried interest

• Is carry allocated fund-wide or deal-by-deal?
• What’s the vesting schedule, and what happens if you leave early?
• Review clawback and forfeiture provisions carefully.

2. Assess co-investment opportunities

• Will you have access to co-investment, and under what terms?
• Check minimum commitments, leverage options, and downside protection.
• Understand liquidity—how long your capital will be locked up.

3. Model after-tax outcomes

• Tax treatment varies by jurisdiction and is changing (e.g., UK income tax on carry from 2026).
• Work with advisers to calculate your net position under different scenarios.

4. Explore alternative incentives

• Phantom equity, synthetic carry, and GP stakes can offer alignment but come with different risk profiles.
• Ask how these fit into the overall package and whether they dilute or complement traditional carry.

5. Check governance and transparency

Ensure the firm has clear policies on allocation, disclosure, and conflicts.

The takeaway

Carried interest and co-investment remain powerful tools, but they’re no longer static. For GCs and senior execs in PE, understanding these shifts isn’t optional. It’s a strategic imperative. The next evolution may not be about tweaking old models but inventing new ones: embedding transparency, flexibility and innovation.