Glossary · Fund economics

What is carried interest?

Carried interest is the share of a fund’s profits, typically 20%, that the manager earns after investors get their money back and clear the preferred return.

In practice

Carry is set out in the LPA’s distribution provisions and usually paid to the GP’s management company or to individual professionals through a carry vehicle. Whether it is paid deal by deal or only after the whole fund returns capital changes its timing and risk. It is often confused with the management fee, which is paid regardless of performance.

An example

Round numbers, not a real fund

Say a fund returns $900 million on $500 million invested. With the hurdle cleared and a full catch-up, 20% carry pays the manager $80 million of the $400 million profit.

Why it matters

It is the manager’s main reward for performance, and the reason fund terms are fought over line by line.

A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.

Related terms

Distribution waterfallA distribution waterfall is the order a fund pays out proceeds: investors’ capital, then the preferred return, then the manager’s catch-up, then the split of what remains.
Hurdle rateA hurdle rate, or preferred return, is the minimum yearly return, often 8%, that investors must receive before the manager can start earning carried interest.
GP catch-upThe catch-up is the part of a fund’s waterfall, after the hurdle, where the manager takes most or all distributions until it holds its full share of the profit.
ClawbackA clawback makes a manager return carried interest it was paid early, if later losses mean it received more than its agreed share of the fund’s total profit.
European waterfallA European, or whole-fund, waterfall pays the manager carry only after investors have received all their paid-in capital, plus the preferred return, across the entire fund.

The terms, in the news each morning.

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