Carried Interest (Carry)
Carried interest is performance-based compensation paid to the GP, typically as a percentage of profits under an agreed waterfall.
Definition
Carried interest aligns GP incentives with LP returns by awarding the GP a share of profits, usually after LPs receive return of capital and often a preferred return (hurdle). Carry terms are defined in the fund’s partnership documents and are central to incentive alignment and fairness. Allocator Context Allocators evaluate carry in relation to strategy, risk profile, value creation expectations, and market standards. They also assess whether carry mechanics create incentives for excessive risk-taking or short-term behavior. Decision Authority Carry terms are commonly reviewed during diligence and may require internal approval if outside policy guidelines. Negotiations may occur via side letters or separate economics for strategic investors. Why It Matters for Fundraising Carry is not just economics; it is trust and alignment. Managers who can explain carry mechanics clearly, including hurdles, catch-up, and clawbacks, reduce uncertainty and improve allocator comfort. Key Takeaways Carry is GP performance compensation Mechanics determine true alignment Standardization reduces diligence friction Clear explanation prevents late-stage delays