Carried Interest (Carry)

Allocator relevance: A core economic lever that shapes GP incentives, alignment, and LP net outcomes through the fund waterfall.

Expanded Definition

Carry is typically expressed as a percentage of profits (e.g., 20%) and is governed by distribution waterfall terms in the LPA. The mechanics—preferred return, catch-up, and distribution sequencing—determine not only total economics but also the timing of payouts between LPs and the GP.

For allocators, carry should be evaluated as a system: how it interacts with fees, recycling, valuation policy, and clawback protections. Seemingly small variations can materially change net performance and downside alignment.

How It Works in Practice

Carry is usually calculated at the fund level based on realized distributions, sometimes with interim distributions to the GP as early exits occur. The GP’s actual receipt depends on whether the fund clears the hurdle and how catch-up is structured. In certain structures, carry may be paid deal-by-deal, increasing the importance of clawback enforceability.

Decision Authority and Governance

Governance focuses on ensuring that carry is earned only when LP outcomes are supported over the full fund life. Clawbacks, escrow provisions, and LPAC oversight are common mechanisms to reduce misalignment from early carry distributions.

Common Misconceptions

• Carry is paid on unrealized gains by default.
• Carry terms are standardized across funds.
• Carry alone determines alignment (fees and governance also matter).

Key Takeaways

• Carry is the main upside incentive for the GP.
• Waterfall mechanics determine timing and distribution fairness.
• Clawbacks and governance protections materially affect downside alignment.