Carried Interest (Carry)

Carried interest (or "carry") is the share of investment profits that fund managers receive as performance-based compensation.

Standard Carry Structure

Typical Split: 80/20

LPs receive: 80% of profits
GP receives: 20% of profits (carried interest)

Carry Calculation Example

Fund Size:           $10,000,000
Exit Value:          $30,000,000
Gross Profit:        $20,000,000
Preferred Return:     $2,000,000 (paid first to LPs)
Remaining Profit:    $18,000,000

LP Share (80%):      $14,400,000
GP Carry (20%):       $3,600,000

Carry Hurdles and Waterfalls

Preferred Return (Hurdle)

• LPs receive 8% annual return before carry kicks in
• Protects LP downside

Catch-Up Provision

• After hurdle, GP "catches up" to their 20%
• Typically 100% of profits until GP reaches their share

Clawback

• GP must return carry if fund underperforms overall
• Protects against early winners masking later losses

Tax Treatment

Carried interest is typically taxed at long-term capital gains rates (currently ~20%) rather than ordinary income rates (up to 37%), making it a tax-advantaged form of compensation.