Which of the following best describes 'carried interest'?

'Carried interest' is best described as a performance incentive for general partners in a private equity or investment fund. This concept refers to the share of profits that general partners (the fund managers) receive as a reward for their management and successful investment outcomes. Typically, this incentive is structured as a percentage of the profits that exceed certain performance thresholds, often referred to as the "hurdle rate."

The reason this concept is significant is that it aligns the interests of the general partners with those of the limited partners (the investors). By tying potential earnings to the performance of the fund, general partners are motivated to make sound investment decisions that optimize returns for all stakeholders.

While a deduction from the investor's profit share, a set fee paid before profits are distributed, and funding provided by limited partners all represent aspects of investment structures, they do not capture the essence of carried interest as an incentive based on performance. This distinction is what makes 'B' the most fitting description of carried interest.