Resources / Glossary / Carried interest

Carried interest.

Aka. Carry · the carry · performance allocation
All terms

What is carried interest?

Carried interest is the general partner's cut of the profits a fund generates — the GP's reward for performance, separate from the management fee it charges to run the fund. The market default is 20% of profits, though it ranges from the mid-teens to 30% for the most sought-after managers.

The defining feature of carry is that it is earned, not guaranteed. The GP collects it only after limited partners have been returned their invested capital and, in most funds, a preferred return on top. Until those thresholds are cleared, the GP's profit share is zero — no matter how much paper gain the portfolio shows.

Carry is what aligns a sponsor with its investors. A management fee is paid whether deals work or not; carried interest is paid only if the fund actually makes money for the people who funded it.

How carried interest actually works

Carry is computed through the fund's distribution waterfall — the contractual order in which cash flowing back from exits is split between LPs and the GP.

  1. Return of capital. LPs first receive back every dollar they contributed, including the capital that funded fees and expenses.
  2. Preferred return. LPs then receive a compounding hurdle, conventionally around 8% per year, before the GP shares in any profit.
  3. GP catch-up. Many funds then route a tranche of profit disproportionately to the GP, so that once the catch-up completes the GP has effectively earned its full 20% on all profits, not just profits above the hurdle.
  4. Carried interest split. Remaining profits are split on the carry ratio — typically 80% to LPs, 20% to the GP.

Two structural variables drive how much carry a GP actually pockets. Whether the carry is calculated deal-by-deal (American) or only after the whole fund clears its hurdle (European) changes timing dramatically. And a clawback provision forces the GP to repay carry it took early if later losses mean it was overpaid across the fund's life.

Why carry is the number everyone watches

Carried interest is where a fund manager builds wealth. On a successful fund, carry dwarfs the management fee, and across a partnership it is the primary form of compensation for senior professionals. How carry is split internally — the "carry table" — is the most closely guarded economics inside any firm.

It is also a long-running tax debate. Because carry is treated as a capital gain rather than ordinary income in many jurisdictions, it can be taxed at a lower rate than salary — a treatment critics argue is a loophole and defenders argue reflects genuine investment risk. The rules here shift with legislation, so the qualitative point matters more than any single rate.

Frequently asked.

5 questions
01 Why is carried interest usually 20%?

The 20% figure is convention rather than law — it traces back to early venture and buyout partnerships and has held as a market default for decades. It signals a roughly 80/20 profit split that LPs broadly accept as fair compensation for a manager who delivers returns above the hurdle.

Top-tier managers with persistent outperformance can command 25% or even 30%, while newer or less differentiated funds sometimes accept less. The headline rate, though, is only part of the picture — the hurdle, catch-up, and whether carry is deal-by-deal or whole-fund matter just as much.

02 What's the difference between carried interest and the management fee?

The management fee is a recurring charge — conventionally around 2% of committed capital per year — that funds the GP's operations whether or not deals succeed. It is essentially salary for the firm.

Carried interest is contingent. It is a share of profits paid only after investors get their money and preferred return back, so it rises and falls with how the fund actually performs. Fees keep the lights on; carry is the upside.

03 When does the GP actually receive carry?

Timing depends on the waterfall structure. Under a deal-by-deal (American) waterfall, the GP can collect carry as individual investments are exited, provided that deal's thresholds are met. Under a whole-fund (European) waterfall, the GP receives no carry until the entire fund has returned all capital plus the preferred return — which can mean waiting years.

LPs generally prefer the whole-fund approach because it reduces the risk of overpaying the GP early. Either way, a clawback clause is the backstop that recovers excess carry at the end.

04 What is a clawback in the context of carry?

A clawback obligates the GP to return carried interest it has already received if, by the end of the fund's life, it turns out the GP was paid more than its contractual share of total profits. This typically happens when early winners generate carry but later losers drag down the fund's overall return.

Clawbacks are usually backed by escrow arrangements or personal guarantees from the partners, because LPs want assurance the money can actually be recovered years after it was distributed.

05 How is carried interest tracked across a fund's life?

Carry is never a single calculation — it accrues and reverses as deals exit, hurdles clear, catch-ups run, and clawbacks loom. Keeping an accurate running view requires tying every distribution back to the original LPA terms and every cash flow back to the deal that produced it.

When the underlying deal record, the waterfall logic, and the fund accounting all live in one queryable layer rather than scattered across spreadsheets, the carry position stays auditable for the full life of the fund — not just reconstructed at the next reporting date.

See how the carry waterfall stays
auditable for the life of the fund.

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