Carried Interest
Definition
Carried interest, or carry, is the general partner's share of a private fund's profits, paid through the distribution waterfall after limited partners have received their contributed capital and, in most funds, a preferred return. The standard rate is 20 percent of profits, with 25 to 30 percent at some venture and specialist managers and 10 to 15 percent in many credit funds. Carry is not a fee: it is a partnership interest in the fund's gains, which is why it is paid only when the fund distributes profit, why it can be clawed back if early distributions prove too generous, and why in the United States it has been taxed as capital gain rather than ordinary income when the underlying assets were held for more than three years. The manager's carry is divided among its partners and investment staff under a separate vesting schedule that investors do not see.
Why it matters
Carry is the largest single transfer from investors to managers in private markets, and the one whose size depends entirely on clauses most investors never read. A 20 percent rate can produce very different dollar outcomes depending on the hurdle, the catch-up, whether the waterfall runs whole-fund or deal-by-deal, whether losses are netted, and whether the clawback is real. For an individual reaching a fund through an access platform, carry is also the layer that the platform's own fee page rarely quotes, because it belongs to the underlying manager.
Common misconceptions
- •Carry is not charged on the investor's whole return. It is charged on profit, after the return of capital and usually after the preferred return; on a fund that returns exactly its capital, carry is zero.
- •A 20 percent carry rate does not mean the manager takes 20 percent of the money. On a 1.8x fund the manager's carry is about 8.9 percent of total distributions; on a 1.2x fund with an 8 percent compounded hurdle over five years it is zero.
- •Carry paid is not always carry earned. Under a deal-by-deal waterfall, early carry can exceed what the fund's final results justify; the clawback exists to correct it, and whether it works depends on who owes it.
- •The management fee is not a smaller version of carry. It is paid on committed or invested capital regardless of performance; carry is paid on profit. Funds that waive part of the management fee in exchange for a larger carry allocation are shifting certain income into contingent income, which is a different bargain.
Technical details
Worked example on a $100 million fund
Assume $100 million contributed, an 8 percent compounded preferred return, a full catch-up and 20 percent carry, and $180 million distributed over five years.
Return of capital: $100 million to investors. Preferred return: about $46.9 million to investors. Catch-up: the next $11.7 million to the manager. Split: the remaining $21.4 million at 80/20, $17.1 million to investors and $4.3 million to the manager.
Totals: investors $164.0 million, manager $16.0 million, which is exactly 20 percent of the $80 million profit.
The same fund with a hard hurdle (no catch-up) pays the manager 20 percent of the $33.1 million above the hurdle: $6.6 million. With no hurdle at all: $16 million, the same as the full-catch-up case.
Rates by strategy, as commonly documented
Buyout and growth equity: 20 percent, occasionally with tiered carry rising to 25 or 30 percent above a 2.5x or 3.0x net multiple.
Venture capital: 20 percent at most managers; 25 to 30 percent at a small number of established firms; often no preferred return.
Private credit and direct lending: 10 to 15 percent, sometimes 20, usually with a 6 to 8 percent hurdle; BDC and interval fund incentive fees are the registered-fund equivalent.
Real estate: a promote of 20 percent above an 8 percent hurdle, often tiered by IRR band; fund-level carry in commingled funds.
Infrastructure: 10 to 20 percent with a 6 to 8 percent hurdle, often whole-fund.
Secondaries and fund of funds: 10 to 12.5 percent, occasionally lower, over a 7 to 8 percent hurdle.
Whole-fund versus deal-by-deal, and the clawback
Whole-fund: carry is computed on the fund's aggregate profit. Overpayment is unlikely because the manager is paid last.
Deal-by-deal: carry is computed per realized investment, so early winners pay carry before later losers are known. Documents mitigate this with loss netting (realized losses and unrealized write-downs reduce the profit on which carry is calculated), an escrow holding back part of each carry payment, interim clawback tests every few years, and a final clawback at liquidation.
The clawback is only as strong as its obligor. A guarantee from the individual partners, a joint and several obligation, and a net-of-tax calculation are the three terms that decide whether overpaid carry actually comes back.
Accounting and disclosure
Funds accrue carry against unrealized gains in their financial statements, shown as carried interest allocated to the general partner or as a liability, so the NAV an investor sees in a quarterly report is usually already net of the carry the manager would receive if the portfolio were sold at its marked value.
The manager's Form ADV Part 2 discloses the existence and rate of performance-based compensation; the LPA or PPM discloses the mechanics.
For registered vehicles (interval funds, BDCs) the incentive fee appears as a line in the fee table of the prospectus, with the hurdle and catch-up described in the fee table footnotes.
What an access-fund investor should check
The master fund's carry rate, hurdle, catch-up and waterfall type, which govern the underlying economics.
Whether the feeder adds any performance fee of its own on top; most do not, some do.
How the feeder reports the master fund's accrued carry in the NAV it shows on the platform.
AltStreet's iCapital review sets out the platform's own disclosed fee layers, and the feeder fund and access fund pages explain the two-tier structure these vehicles use.
Frequently asked questions
- What is carried interest in simple terms?
- The manager's cut of a fund's profits, usually 20 percent. If a fund turns $100 million into $180 million, the $80 million gain is split, in the standard structure, $64 million to investors and $16 million to the manager as carry, after investors have first received their $100 million back and their preferred return. The manager's management fee is separate and is charged whether or not the fund makes money.
- How is 2 and 20 different from carried interest?
- Two and twenty is shorthand for the whole fee structure: a 2 percent annual management fee on committed capital and a 20 percent carried interest on profits. The 2 covers the manager's operating costs and is paid regardless of results; the 20 is the carry and is paid only from realized gains through the waterfall. Many funds now charge less than 2, step the fee down after the investment period, or offset it with transaction fees, while 20 percent carry has stayed remarkably fixed.
- When is carried interest actually paid?
- When the fund distributes profits that have cleared the earlier waterfall tiers. In a whole-fund (European) waterfall that is typically years six to ten of a fund's life, after all capital and the preferred return on all of it are back. In a deal-by-deal (American) waterfall it can be paid on the first profitable exit, subject to netting of losses and a clawback at the end of the fund. Unrealized gains marked in the fund's NAV do not pay carry, though they can accrue it in the fund's accounts.
- Who receives the carry inside the manager?
- The general partner entity receives it from the fund and allocates it to the firm's partners and staff under a carry-sharing plan that vests over years, often four to six, and is forfeited on departure. Founders usually keep the largest share; the firm may also hold a share centrally. Investors do not see this allocation, but it matters to them: a team whose carry has vested has less incentive to stay, which is what the key person clause addresses.
- How is carried interest taxed?
- In the United States, carry allocated from gains on assets held more than three years is taxed to the recipient as long-term capital gain (the three-year rule came in with the 2017 tax law, replacing a one-year test); shorter holds produce short-term gain taxed at ordinary rates. Several proposals to tax all carry as ordinary income have been introduced and not enacted as of 2026. The United Kingdom taxes most carry as capital gain at a special rate; several European countries tax it as employment income. This page describes the general rule and is not tax advice.
- Do access funds and feeders charge carried interest?
- The feeder itself usually does not, but the master fund's carry applies in full to the capital the feeder invests, so an individual investor bears the underlying manager's 20 percent plus the feeder's own management fee. A minority of platform vehicles add a performance fee at the feeder level; that is a second carry and should be visible in the feeder's summary of terms.