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If there’s one thing our broad experience has taught us, it’s this: One size does not fit all.
Accounting Today
Accounting Today
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Carried interest is intended to align the economic interests of sponsors and investors, but the tax consequences do not always align with cash distributions. In certain private equity fund structures, general partners (GPs) may be allocated taxable income before receiving the corresponding carried interest distributions.
Key considerations include:
Many private equity sponsors are surprised to learn that taxable income and cash distributions do not always occur simultaneously.
While the GP’s economic entitlement is typically realized through carried interest, the tax rules governing partnership allocations can result in taxable income being allocated before the associated cash is distributed.
In a traditional private equity structure, limited partners (LPs) must first recover invested capital and, in many cases, achieve a preferred return before the GP becomes entitled to carried interest distributions. Collectively, these requirements are often referred to as the fund's hurdle.
Although the hurdle may delay cash distributions to the GP, taxable income allocations can occur earlier depending on the partnership agreement, allocation methodology, and the nature of the fund's underlying investments.
As a result, a GP may receive a Schedule K-1 reflecting taxable income while having received little or no corresponding cash.
Cash carry represents the actual cash distributions received by the GP as carried interest.
Once investors have satisfied the applicable hurdle requirements, the GP typically receives an agreed-upon percentage of future profits, commonly 20%.
Simply put, cash carry reflects the economic benefit received by the sponsor.
Tax carry refers to the taxable income allocated to the GP for tax reporting purposes.
Depending on the structure of the fund and the allocation provisions within the operating agreement, taxable income may be allocated before cash carry is distributed.
When this occurs, GP owners may be required to pay taxes on income that has not yet been monetized through distributions.
Many private equity funds address the cash vs. tax carry issue through tax distribution provisions.
Tax distributions are designed to provide liquidity to partners when taxable income allocations create a tax obligation before sufficient cash is otherwise distributed.
These provisions typically:
Thoughtful tax distribution provisions can improve liquidity management and reduce friction among stakeholders during periods of strong taxable performance but limited cash distributions.
Funds may face a heightened risk of a cash vs. tax carry mismatch when:
Assume a fund generates $100 million of taxable profits and the GP is entitled to a 20% carried interest.
Although the GP's economic share of profits is $20 million, the fund's waterfall may require investors to first satisfy capital recovery and preferred return thresholds before the GP receives a cash carry distribution.
Under certain allocation methodologies, the GP may nevertheless be allocated taxable income associated with its carried interest.
The result is a potential tax liability today on income that may not be distributed in cash until a later period.
Tax distributions can be one of the most effective tools for managing mismatches between taxable income and available cash. CFOs should assess whether existing fund agreements adequately address partner tax obligations and whether future fund structures should incorporate more robust provisions.
The timing of taxable allocations is often influenced by carry waterfalls, catch-up mechanisms, capital account maintenance provisions, and other partnership agreement terms. Periodic reviews can help identify areas where taxable income and cash economics may diverge.
Sponsors should understand potential tax obligations under various performance scenarios and ensure adequate liquidity is available if taxable income is allocated before cash distributions occur.
PortCo distribution policies can materially influence fund-level liquidity. Aligning cash distribution expectations with tax projections can help minimize unexpected liquidity pressures.
Tax planning opportunities at both the fund and PortCo level may help mitigate future taxable income exposure, improve cash flow alignment, and reduce the likelihood of significant tax liabilities arising before economic realizations.
Managing the cash vs. tax carry mismatch requires a coordinated understanding of fund economics, partnership taxation, and liquidity planning.
Elliott Davis works with private equity sponsors, management companies, and fund finance teams to:
For many funds, the real challenge is not the amount of carry generated, but the timing of when taxable income is allocated and cash is received by the GP. Understanding that difference can help CFOs make more informed decisions today while positioning future funds for greater efficiency.
Contact us to discuss your fund’s tax and liquidity planning considerations.
The most sought-after CFOs are leading successful organizations and focused on driving results, not searching job postings. For companies seeking a leader who can drive strategy, support growth, improve operations, and lead through change, these are the candidates they want to reach.
As the role has expanded, so have the consequences of the hire. The right CFO can strengthen execution and help position the business for future opportunities, while the wrong fit can hinder progress at critical moments.
Executive search firms provide access to broader talent networks, stronger candidate assessment, and a more strategic hiring process. This article examines why executive search remains a valuable investment when making one of a company's most important leadership hires.
The need for a CFO is usually driven by a significant business transition that requires financial leaders with new capabilities and experience.
Common drivers include:
Executive search helps identify candidates whose backgrounds match the organization's priorities and growth trajectory.
At first glance, hiring a CFO may seem straightforward. A company needs a senior finance leader, so it posts the role, reviews resumes, interviews candidates, and makes a selection. In practice, the process is rarely that simple.
Top CFO candidates come from a variety of professional backgrounds. Some have deep accounting and controllership experience, while others specialize in transactions and business transformation.
The challenge is determining which capabilities the organization needs most. Without a clear understanding of the organization’s priorities, culture, and stage of growth, companies can waste time evaluating candidates who cannot address their most pressing needs.
The strongest CFO candidates are already busy leading successful organizations. They are unlikely to browse job postings or respond to traditional recruiting outreach. Companies that rely solely on inbound applicants or personal networks may miss highly qualified talent.
Executive search addresses this gap through proactive market mapping, confidential outreach, and calibrated candidate development.
The stakes are high. The wrong CFO can create reporting delays, weaken forecasting, and limit visibility into business performance. A disciplined executive search process helps organizations reduce hiring risk and identify a leader with the experience and capabilities needed to support their business objectives.
Executive search is typically viewed as a recruiting expense. For a CFO hire, it is more accurately a business investment tied to leadership effectiveness, execution, and organizational performance.
Retained search provides access to passive candidates, market intelligence on compensation and role design, and a more rigorous evaluation process. Structured interviews, leadership assessments, and in-depth referencing can improve decision quality while reducing the risk of an expensive mis-hire.
An open CFO role can slow execution and create leadership gaps. By helping organizations identify qualified candidates and support onboarding and transition, retained executive search improves the likelihood of a successful hire and faster impact.
The search does not end when the offer is accepted. For a CFO to be effective, the transition must be intentional.
A strong onboarding plan helps the CFO understand the business, build relationships with key stakeholders, assess the current finance function, and identify priorities for the first 100 days. This is especially important when the role includes operational integration, capital planning, transaction readiness, systems improvement, or board-level reporting.
Executive search firms can support onboarding and transition planning, helping new CFOs establish credibility, build key relationships, and contribute more quickly.
1. When should a company hire a CFO? Companies typically hire a CFO during periods of growth, transactions, private equity investment, increasing operational complexity, or leadership transition. These events often require more sophisticated financial leadership and oversight.
2. How do I find the right CFO for my business? Start by identifying the experience, leadership style, and capabilities needed to support your business objectives. Executive search firms can help assess candidates and expand access to qualified talent.
3. When should a company hire a professional executive search team? Companies often engage executive search firms when a CFO hire is tied to a transaction, private equity investment, ERP modernization, rapid expansion, or succession planning. These situations frequently require specialized experience and a broader candidate search.
4. How long does a CFO search take? A CFO search typically takes a few months, depending on the role requirements, candidate availability, and hiring process. Searches requiring specialized experience may take longer. Working with a retained search firm provides a structured process, weekly progress reporting, and full visibility into the candidate pipeline, helping improve efficiency and giving stakeholders greater confidence in the final hiring decision.
5. Does executive search help with private equity, transactions, and business transformation? Yes. Executive search firms help organizations identify CFOs with experience leading transactions, private equity-backed companies, and business transformation initiatives through broader market access and structured candidate evaluation.
Through AMPLOS, powered by Elliott Davis, companies gain a retained executive search team focused on identifying senior leaders who align with business needs, leadership priorities, and future objectives.
For CFO searches, AMPLOS brings market insight, rigorous assessment, and a confidential search process to help organizations secure leaders with the experience relevant to their operational, financial, and strategic challenges.
Whether your company is preparing for a transaction, expanding operations, or building a stronger finance function, our team can help define the role, identify qualified candidates, and facilitate a successful transition.
Contact us today to start the conversation.
Edit: Originally published on August 8, 2023. Updated to reflect current internal controls best practices.
A day at any business may differ from company to company based on the services or products it offers, but all businesses have perform similar operational activities, including meetings, contracts, approvals, reporting, and execution. These tasks introduce risks, such as missing or inappropriate approvals, incomplete or inaccurate data, fraud, inconsistent execution, inefficient handoffs, and reputational damage, among others. Without a defined structure to govern how work gets done, these risks compound over time, creating control failures, inefficiencies, and exposure that can impact financial reporting, decision-making, and the organization’s ability to scale.
This is where internal controls play an important role. When thoughtfully designed and well executed, internal controls bring structure and accountability to routine activities, reducing the likelihood and impact of operational, financial, and compliance risks. Having good internal controls in place is the key for any business to thrive. When questions arise about the effectiveness of existing controls, it is often a signal for leadership to reassess, reorganize, and, when appropriate, seek additional perspective.
Strengthening internal controls does not always require a significant new investment. Many times, all that is needed is a recalibration of what is already in place. Reassessing current processes, ownership, and system use can reduce risk while improving efficiency and consistency.
Internal controls are deliberate activities carried out or governed by people, embedded in processes, and enabled by technology to reduce risk and strengthen how an organization operates. They establish clear expectations around who is responsible, how work should be performed, and where oversight occurs. Without this structure, variability in execution increases, making it harder to identify issues, enforce accountability, or support well-informed decision-making.
Internal controls operate across three interconnected components: people, process, and technology. When aligned, they create a coordinated control environment that drives greater efficiency, enhances risk mitigation, and enables scalable, sustainable growth.
Internal controls designed through an integrated people, process, and technology lens help organizations manage risk in line with their risk appetite, drive productivity and efficiency, create value, and support the achievement of strategic goals.
This article is the first in a series that explores each area—people, process, and technology—why they are important, and how to evaluate where risk may be building and where improvements can have the greatest impact.
Strong governance frameworks reinforce transparency, accountability, and sustained performance. Effective organizations rely on disciplined controls and well-defined processes to support sound decision-making, manage risk, and remain audit-ready.
At Elliott Davis, our team helps organizations identify and implement practical improvements across governance, processes, and reporting, including the ability to:
Contact us today to get started and explore other articles in the series:
