Carried Interest Structure

Carried Interest Structure defines how the GP receives performance compensation (carry) and under what conditions. It interacts directly with the distribution waterfall, preferred return, catch-up mechanics, recycling, and clawback provisions.

From an allocator perspective, carry is not “20%.” Carry is a system: timing, calculation base, and enforcement determine whether the GP is paid only after LP economics are secure—or whether early carry creates future clawback risk.

How allocators define carry risk drivers

Allocators evaluate carry through:

• Waterfall type: European vs American and timing implications
• Preferred return and catch-up: how quickly carry turns on
• Carry calculation base: net of fees/expenses, realized vs unrealized treatment
• Clawback protection: escrow/holdbacks, netting, enforceability
• Recycling impact: whether reinvestment changes carry timing
• Deal-by-deal vs fund-level economics: misalignment and overpayment risk
• Reporting transparency: ability to audit carry calculations

Allocator framing:
“Does carry reward realized outcomes—or does it monetize early with clawback reliance?”

Where carry structure matters most

• strategies with early distributions and long tail risk
• funds with high dispersion and valuation discretion
• managers with aggressive recycling/extension behaviors
• LPs with strict governance and reputational sensitivity

How carry structure changes outcomes

Strong carry alignment:

• reduces end-of-fund disputes
• improves IC defensibility and trust
• increases re-up probability and long-term partnership value

Weak carry alignment:

• increases clawback disputes at fund end
• creates perception of misalignment during drawdowns
• drives heavier side-letter protections
• can slow fundraising even with strong performance

How allocators evaluate carry discipline

Conviction increases when:

• carry is tied to realized performance with fund-level protections
• clawback protections are practical and enforceable
• calculations are transparent and auditable
• terms are consistent across documents and vehicles

What slows allocator decision-making

• deal-by-deal carry with weak clawback structure
• ambiguous fee/expense netting in carry calculations
• aggressive catch-up terms without clear rationale
• inconsistent terms across vehicles or side letters

Common misconceptions

• “20% carry is standard” → structure matters more than headline %.
• “Clawback solves misalignment” → only if enforceable.
• “European vs American is preference” → it changes timing and risk materially.

Key allocator questions during diligence

• Is carry calculated fund-level or deal-by-deal?
• How does pref + catch-up activate carry?
• What clawback protection exists (escrow/holdbacks/netting)?
• How do fees/expenses affect carry calculations?
• How transparent are carry calculation reports?