About Carried Interest Agreements and the Tracking of Carried Interest

Set up a carried interest agreement in Oracle Joint Venture Management to enable the partners in a joint venture to carry the interest of another partner for a period of time.

A carried interest agreement is an arrangement between partners of a joint venture in which one or more partners agree to carry the interest for one or more other partners. It’s typically a supplement or an addendum to a joint operating agreement. Here are some scenarios for adding a carried interest agreement to a joint venture:

• A partner in a joint venture declines to participate in a particular development or project in a joint venture, such as an oil drilling site. The partner is unwilling to take on the risk if the project isn’t profitable, and the other partners wish to continue.
• A partner’s finances are insolvent and needs their share of costs carried by the other partners until the partner becomes financially solvent.
• In the oil and gas industry, a government entity or another business owns the mineral rights to an oil field. They participate as a partner in the joint venture but aren’t responsible for costs until the project becomes profitable.

Note: In Joint Venture Management, partners are referred to as stakeholders. Therefore, hereafter the partners in a carried interest agreement are referred to as stakeholders.

When you set up a carried interest agreement in Joint Venture Management, you provide the following details:

• Each consenting stakeholder and nonconsenting stakeholder and the percentage of the nonconsenting stakeholder’s interest that each consenting stakeholder is carrying.

  For example, you can have a stakeholder that is carrying 100% of another stakeholder’s interest, two stakeholders that are each carrying 50% of another stakeholder’s interest, and so forth.

• Identification of one or more ownership definitions that contain the ownership percentages for the stakeholders prior to the carried interest agreement. This is referred to as the source ownership definition.
• Identification of the consenting stakeholders for which you want to create carried interest journals.

  This is an optional setup that pertains only to internal stakeholders that are the consenting stakeholders in a carried interest agreement. Its primary purpose is to enable you to track the costs and revenue that a joint venture operator is carrying for nonconsenting stakeholders, but you can also perform the setup for an internal stakeholder that is a nonoperator. See Create Carried Interest Journals for more information.

The application uses these details to generate a carried interest ownership definition. A carried interest ownership definition contains the percentages for the consenting stakeholders only, with each consenting stakeholder’s percentage increased in proportion to their share of the nonconsenting stakeholder’s interest.

In the setup of your joint venture, you can insert the carried interest ownership definition where it applies. When the setup is complete, you can process joint venture transactions and generate the following distributions:

• Standard distributions to bill and pay the consenting stakeholders for their share of costs and revenue, which includes the share that they are carrying for nonconsenting stakeholders.
• Carried interest distributions to track the carried interest.

  Carried interest distributions are created for all transactions that were distributed according to the carried interest agreement. For reporting purposes, you can export carried interest distributions to a spreadsheet to track the amounts consenting stakeholders carry for nonconsenting stakeholders.

  Carried interest distributions aren’t invoiced. However, you have the option to create carried interest journals to account for the amounts consenting stakeholders carry for nonconsenting stakeholders.