Carried Interest Explainer
Carried interest is the share of investment profits allocated to a private fund’s manager after contractual conditions are met. It is commonly called carry. The manager may receive carry even though limited partners supplied most of the investment capital, because the allocation rewards investment selection, oversight, and successful exits.
A typical waterfall first returns investor capital and may provide a preferred return. A catch-up can then shift distributions toward the manager before remaining profits are split at the agreed ratio. European-style waterfalls generally measure performance across the whole fund, while deal-by-deal structures can pay carry earlier.
Carry aligns the manager with upside and can attract skilled teams without requiring them to contribute the same capital as institutions. Vesting, key-person rules, escrow, and clawback provisions may protect against early payments that exceed the final amount earned.
The headline percentage is only one part of the economics. Investors should analyze the hurdle, catch-up, calculation base, timing, recycling, taxes, unrealized valuations, and clawback credit risk. A manager can show strong gross investment performance while limited partners receive materially less after fees, expenses, and carry.
The manager participates in gains after the waterfall’s conditions.
It is separate from the management fee.
Whole-fund and deal-by-deal structures can pay carry differently.
Hurdles and catch-ups also matter.
Later losses can make early carry too large.
Contractual repayment mechanisms protect investors.
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