What is deal-by-deal carry?
Deal-by-deal carry is a carried-interest structure in which the general partner earns its share of profit on each investment as that investment is realized, rather than waiting until the fund as a whole has returned all drawn capital. It is the defining feature of the so-called American waterfall.
Under this approach, when a single portfolio company is sold at a gain, the proceeds run through the fund's distribution waterfall for that deal alone. If the deal cleared its hurdle, the GP takes carry on it — even though other companies in the portfolio may still be held at cost or written down.
The structure is GP-favorable on timing: carry arrives earlier in the fund's life. Its counterpart, whole-fund carry (the European waterfall), defers all carry until limited partners have recovered their entire capital base plus the preferred return.
How deal-by-deal carry actually works
Each realization is run through the waterfall on a standalone basis, in roughly this order:
- Return of capital for that deal. LPs first receive back the capital invested in the specific company being exited, often grossed up for an allocated share of fees and expenses.
- Preferred return. The deal must clear its hurdle — the LPs' preferred return on the capital attributable to it — before carry is paid.
- GP catch-up. The GP receives a disproportionate slice of the next dollars until it has caught up to its agreed carry percentage on the profit.
- Carry split. Remaining profit splits at the carried-interest rate, commonly 80/20 in the LPs' favor.
Because losers in the portfolio have not yet been crystallized when early winners pay out, deal-by-deal structures rely heavily on a clawback and an escrow/holdback to recover carry that, with hindsight, was paid too early.
Why LPs scrutinize it
The risk to limited partners is overpayment. If the GP collects carry on the first two exits and the remaining portfolio sours, the GP may have been paid carry on profits the fund never actually delivered on a net basis. Recovering that money depends on the clawback being enforceable and the GP being solvent years later.
To manage this, well-negotiated deal-by-deal terms include an interim aggregation test (often netting losses and write-downs against gains before carry is released), meaningful escrow of GP carry, and joint-and-several or guaranteed clawback obligations from the individual partners.