Carry On… and Get Your Prenup. Protecting Carried Interest on Divorce

Back in 2023, I wrote an article for AlphaWeek about carried interest in divorce cases – Carry on Divorce.  In the three years' since then, there's been several further carried interest cases and so I thought it was high time I wrote a follow-up.

If you are a fund manager, are married or civil partnered, or intend to get married or simply live with your partner, given forthcoming law reform which is likely to make changes for cohabitants, and you have ever wondered what happens to carried interest on divorce or relationship breakdown, then this article is for you. And that goes for whether the funds are onshore or offshore, in private equity, hedge funds or venture capital.

On divorce, there is no legal entitlement to share in an ex-spouse's future income (Waggott v Waggott). The entitlement to share applies only to capital and to matrimonial assets (Standish v Standish). Non-matrimonial property is treated differently. But carried interest is a hybrid creature and so it is helpful to understand the court's approach and what may or may not be vulnerable to sharing claims on divorce (and to what you or your clients can do to mitigate it and protect the fund).

In my last article I looked at the cases of B v B [2013] EWHC 1232 (an early case dealing with complex financial incentives resembling carry, demonstrating the court's willingness to engage with hybrid remuneration structures), and A v M [201] EWFC 89 which might be considered a 'cornerstone' authority and where Mostyn J characterised carry as a hybrid (part income/part capital) resource and applied a formulaic approach to how the matrimonial element of the carry should be calculated. You can find a reminder of the formula and my worked example there.

Since then, there have been a number of court decisions which remind us that judges add their own interpretations to the body of law through our discretionary system and that it is worth thinking carefully about how you might protect carried interest against claims on any future relationship breakdown.

A holistic approach?

In ES v SS [2023] EWFC 177, rather than apply the mathematical formula promoted in A v M, the judge's approach was to seek 'a fair outcome and one that reflected the provenance of the funds and post-separation endeavour', and broadly assessed (without reference to any mathematical calculation), that the wife was entitled to 20% of the husband's share in a fund identified a year before separation and funded around the time of separation (with the exit not yet having occurred at the time of the court hearing), and 40% of the husband's interest in an earlier fund, identified 3 years before separation, funded 2 years before separation, but which also had not yet exited.  Rather than the wife receiving a 'buy out' at the current valuations of those investments (which the husband was seeking), the judge gave the wife a 'Wells' sharing order, which means the husband has to pay the wife the determined percentage of the investment proceeds when realised, due to the potential for the husband to receive a much larger, or indeed lower, sum than the current valuations.

Back to broad brush evaluations and valuation at the date of separation or date of trial?

ED v AP [2025] EWFC 399 offers us another soft challenge to the rigid formulaic approach we can see in A v M, where the division of carry was achieved through a broad evaluation, rather than application of a formula. In assessing the extent to which the carry was matrimonial, the judge rejected the date of trial as being the cut-off date, preferring to use the date of the separation and its first-year anniversary as markers, thus putting an emphasis on what the assets would have been had the husband left the private equity house at the date of separation. 

The Judge found that a “broad and mathematical” approach was required, combining numerical analysis with judicial discretion. One complication (which is not unusual) was that the receipt of carry in one fund was dependent on another fund's performance. This impacted the judge's assessment because whilst the former comprised marital endeavour, actual payment depended on the performance of a different fund which involved post-separation endeavour. Ultimately, the judge held that the wife was entitled to share in three fund carry interests as they were all mostly the product of marital endeavour. The percentage of her sharing claim varied for each fund (between 30% and 50% of the husband's interest), and once again this was on a Wells sharing basis.

Which all goes to show that family judges are adept at applying their own solutions where distinctions arise between fund structures and payout mechanism. The approach to vested and unvested carry varies from case to case, so does this make future-proofing carried interest ever possible?

Here are some steps you might want to consider to protect your carried interests

1. If you are in a cohabiting relationship (living together but not married or in a civil partnership), keep an eye on the news – the government has recently launched a consultation on law reform, and it is likely that cohabiting couples are finally going to be granted more protections (and financial claims) than they currently have. Such rights may be restricted to needs but could potentially extend beyond and so get informed. It may be worthwhile signing a cohabitation agreement with your partner.
2. If you are not married, consider getting advice on a prenuptial agreement. This will engage you in some (perhaps tricky but important) discussions about how carry should be dealt with in the unfortunate event of a divorce. And you may be able to ring-fence existing carry and future carry entitlements with careful definitions of what constitutes non-matrimonial property and zone in on how future carry payments will vest and what this will mean for you both in practical terms.
3. If you are already married then you can always consider a post-nuptial agreement to regulate what should happen to your funds and carry should you decide to separate later down the line.
4. Consider avoiding family dependency on carry during your marriage if you can afford to. If your family lifestyle is funded with other assets then it may be easier to argue that carry is not central to your standard of living on any future divorce.
5. Placing carry into a properly constituted trust may offer some protection, although care needs to be taken to ensure that this will not be considered a nuptial settlement (contentious trusts advice will be a must – my colleagues will attest to that).
6. A reminder that a revised tax regime now applies to carry (see our post about that here).

Take advice and take it early and once you have then (yep, I'm going to say it) you can keep calm and carry on.

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Adele Pledger is a Partner in the Family team at Withers LLP in London

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group