Glossary · Fund economics

Carried Interest (Carry)

Also called: carried interest allocation · performance allocation

Carried interest (carry) is the share of a private fund's profits allocated to the general partner, commonly 20%, after LPs have received back their contributed capital and any preferred return required by the waterfall.

Publisher: Altss LLCPublished 2026-01-06Content modified 2026-10-02

ALTSS-ECON-005

Carry is the manager's performance share. LPs supply almost all of the capital; the general partner receives a disproportionate share of the profit, but only of profit, and usually only after LPs have been repaid and earned a minimum return. Legally it is an allocation of partnership profits to the GP or to a carry vehicle owned by the investment team, not a fee for services; in the US that is why its tax treatment can differ from that of the management fee.

Formula

Carry once the preferred return is paid and the catch-up is complete

C = c × max(0, D − K)

C: cumulative carried interest allocated to the GP
c: carry rate, e.g. 20%
D: cumulative distributable proceeds of the pool the waterfall measures (the whole fund, or one realised deal)
K: contributed capital for that pool, including capital called for fees and expenses where the LPA says so

The formula holds only above the point where a full catch-up completes. With no catch-up (a hard hurdle), carry is c × (D − K − P), where P is the preferred return amount. Below the completion point, carry follows the waterfall tier by tier and is less than c × (D − K).

Calculator

Whole-fund waterfall calculator

One contribution at the start and one distribution after the holding period. Tiers: return of capital, preferred return, GP catch-up, then the carry split. Set catch-up to 0 for no catch-up. Real LPAs add fees, expenses, multiple cash flows and clawback; this shows the mechanics only.

Capital contributedTotal distributableYears heldPreferred return (%)Carried interest (%)GP catch-up share (%)Preferred return basis

Waterfall allocation by tier
Tier	LPs	GP
1. Return of capital	100	0
2. Preferred return	46.93	0
3. Catch-up	0	11.73
4. Carried-interest split	33.07	8.27
Total	180	20

GP share of total profit: 20.00%

Where carry comes from

Carry is paid inside the distribution waterfall: return of contributed capital, then the preferred return, then the GP catch-up, then a split of further profit, commonly 80/20. A carry rate of 20% is the standard reference point. Some venture managers with long records charge more, sometimes with the higher rate applying only above a return multiple; lower-return strategies such as many credit funds pair lower carry with different hurdles.

Whole-fund and deal-by-deal carry

Under a European (whole-fund) waterfall, carry is paid only after LPs have received back all contributed capital and the preferred return across the fund. Under an American (deal-by-deal) waterfall, carry is paid as individual investments are realised, which brings it forward and creates the risk that early carry exceeds what the whole fund supports. That risk is handled by a GP clawback, often backed by a carry escrow. The European/American labels are not used consistently, so the mechanics in the LPA matter more than the name.

An allocation, not a fee

Carry is allocated through the partnership's capital accounts to the general partner or to a separate carry vehicle whose members are the investment professionals. Because it is a share of partnership profit, in the US its tax character generally follows the fund's underlying income and gains: a partner's distributive share keeps the character it had at partnership level (Internal Revenue Code section 702(b)). Section 1061 then applies to an "applicable partnership interest", one held in connection with the performance of substantial services in an applicable trade or business: long-term capital gain on it is treated as short-term to the extent it would not be long-term under a three-year rather than a one-year holding period; see carried interest taxation. Other jurisdictions apply their own rules.

Accrued and realised carry

Quarterly reports show accrued (unrealised) carry: the carry the GP would receive if the fund sold everything at reported NAV and ran the waterfall that day. It reduces the LPs' share of NAV on the capital account statement but can reverse if values fall. Realised carry is carry actually distributed. Analysts reading net returns check how much of the gap between gross and net value is accrued carry that has not been paid.

What LPs check

Carry rate and any tiers; hurdle and whether it compounds; catch-up percentage; whole-fund or deal-by-deal; whether fees and expenses are returned before carry; treatment of written-down deals in a deal-by-deal waterfall; tax distributions to the GP; clawback security (escrow, guarantees, net-of-tax cap); and whether the GP's own commitment bears carry (it usually does not).

Worked examples

Illustrative whole-fund carry with an 8% preferred return and full catch-up ($ millions)

Simplified to one contribution and one distribution: LPs contribute 100 (investments, fees and expenses) and the fund distributes 250 seven years later. LPs first receive their 100 and a preferred return of 71.38 (8% compounded for seven years). The GP then receives 17.85 of catch-up, which brings it to 20% of everything distributed above capital. The remaining 60.77 splits 80/20. Carry: 30.0, exactly 20% of the 150 profit; LPs receive 220.

The same fund with no catch-up

Remove the catch-up and the GP takes 20% only of the 78.62 left after capital and pref. Carry falls to 15.72, or 10.5% of total profit. The headline "20% carry" therefore means different amounts depending on the waterfall.

Examples are illustrative; figures are not market data.

Not the same as

Management Fee: The management fee is paid whatever the result; carry is paid only from profit.
Performance Fee: A hedge-fund performance fee is charged periodically on gains in NAV above a high-water mark; private-fund carry is measured on realised cash through a waterfall over the fund's life.
Promote: Promote is the real estate and joint-venture name for the sponsor's profit share, typically set in tiers by IRR hurdle at deal level.

Common mistakes

Calling carry a fee. It is an allocation of partnership profit, which drives its legal treatment and, in the US, its tax treatment.
Reading "20% carry" as 20% of profit above the preferred return. With a full catch-up it becomes 20% of all profit once the catch-up is complete.
Treating accrued carry in NAV as earned. It is a hypothetical liquidation amount and can reverse.
Comparing carry rates without comparing waterfall type, hurdle and catch-up.

Edge cases

Tax distributions to the GP on allocated but undistributed profit are advances against carry and normally fall within the clawback.
In a GP-led continuation vehicle the selling fund may crystallise carry on the transfer, and the GP may earn new carry in the continuation vehicle.
Unvested carry of a departing team member is usually forfeited or reallocated under the carry vehicle's good-leaver and bad-leaver terms.

Questions

Is carried interest 20% of all profits?

With a preferred return and a full catch-up, yes, once profit is large enough to complete the catch-up. Without a catch-up, or below the completion point, the GP receives less than 20% of total profit.

When is carried interest paid?

Under a whole-fund waterfall, after LPs have received all contributed capital plus the preferred return. Under a deal-by-deal waterfall, as each investment is realised, subject to clawback.

Sources

26 U.S.C. 1061 - Partnership interests held in connection with performance of services (carried interest). U.S. Congress (Internal Revenue Code; LII mirror), Added by Pub. L. 115-97, sec. 13309 (2017-12-22); current text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). 26 U.S.C. 1061(a), (c)(1) — supports: Three-year holding period for long-term capital gain on applicable partnership interests (carried interest)
ILPA Model Limited Partnership Agreement (Whole of Fund and Deal-by-Deal versions). Institutional Limited Partners Association, ILPA, Whole of Fund first released October 2019, updated July 2020; Deal-by-Deal version and term sheet released 22 July 2020. Status: Current (checked 2026-10-01). Whole of Fund and Deal-by-Deal versions: distribution provisions — supports: Carry paid through whole-of-fund or deal-by-deal waterfalls
ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners. Institutional Limited Partners Association, ILPA, Third edition, released 27 June 2019. Status: Current edition (no 4.0 found as of 2026-10-01) (checked 2026-10-01). pp. 10–11 (Waterfall Structure; Calculation of Carried Interest; Clawback) — supports: LP positions on waterfall type and clawback security
26 U.S.C. 702 - Income and credits of partner (702(b) character of distributive share). U.S. Congress (United States Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). Sec. 702(b) — supports: Character of items in a partner's distributive share determined as if realised directly by the partner

8 terms

Concept record

Concept ID: ALTSS-ECON-005
Classification: Fund economics
Topics: Fund terms & economics
Version: 2.0.0
Last reviewed: 2026-10-02
Structured data: JSON
Source check: Tax statements checked against the cited primary sources on 2026-10-02 (how). General information, not advice.