Economics
Carried Interest / Carry
Carried Interest
The share of fund profits (typically 20%) paid to the GP as performance compensation.
Carried interest (or "carry") is the GP's share of fund profits, typically 20% of gains above a preferred return hurdle. It's the primary performance incentive for fund managers.
How carry works
- 1. Fund generates investment profits
- 2. LPs receive their capital back first
- 3. LPs receive preferred return (typically 8%)
- 4. GP receives catch-up to reach 20% of profits
- 5. Remaining profits split 80/20 (LP/GP)
Carry terms
- Hurdle rate: Minimum return before carry kicks in (often 8%)
- Catch-up: GP receives 100% of profits until reaching 20%
- Clawback: GP must return excess carry if fund underperforms
Economic significance
- Carry aligns GP and LP interests, but has been criticized when earned on unrealized gains or when GPs take excessive risk.
Formula
Carry = 20% × (Total Profits - Preferred Return to LPs)Example
A fund that generates $500M in profits above its hurdle rate would pay approximately $100M in carried interest to the GP.
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