Carried interest — carry, promote, performance allocation, all the same thing — is how a private fund sponsor gets paid for performance. It's the last tier of the cascade and the most lobbied-about line in private fund economics. Understanding the headline split is easy. Understanding what the GP actually earns is harder.
The standard structures
- Standard 80/20
- After RoC, pref, and catch-up, all remaining distributions split 80% to LPs and 20% to the GP. The most common structure in institutional buyout, real estate, and infrastructure funds.
- Tiered promote
- The carry rate steps up as the fund clears successive hurdles. A common opportunistic real-estate structure: 80/20 above an 8% IRR hurdle, 70/30 above a 12% hurdle, 60/40 above an 18% hurdle. Each hurdle is a fresh pref + catch-up sequence.
- Higher headline (70/30, 60/40)
- Common in venture, opportunistic, and emerging-manager funds where the LP accepts more carry in exchange for what they hope is outsized return. The asymmetry compensates the GP for taking higher-volatility bets.
How carry actually pays out
Carry is contingent — it only exists if the fund clears its pref. That makes it a pure performance fee, in theory. In practice the timing of payment differs sharply between European and American waterfalls.
- European waterfall.Carry pays out only at the end of the fund's life, after every dollar of LP capital and pref has been returned across all deals. Sometimes called “back-ended” carry. Most LP-favorable.
- American waterfall. Carry pays out per deal as deals exit. Sometimes called “deal-by-deal” carry. The GP can earn meaningful carry on early winners while later deals are still developing — relying on the clawback to reverse if later deals disappoint. See European vs. American Waterfall for the side-by-side example.
A worked example, again
Same setup as the flagship article: $1M LP commitment, 8% compound pref, full GP catch-up, 80/20 split, 5-year hold, 1.75× exit.
| Step | To LP | To GP |
|---|---|---|
| RoC + pref (LP whole at 1.469×) | $1,469,328 | — |
| GP catch-up (to 80/20) | — | $117,332 |
| Carry split on the remainder ($163,340) | $130,672 | $32,668 |
| GP carry total | — | $150,000 |
On a 1.75× exit, the GP earns about 8.6% of gross proceeds — slightly less than the headline 20%. That's the pref doing its job. On a 3.0× exit, the GP's share of profit climbs above 18% because the pref's drag is amortized over a much larger profit base. Run the math live in the flagship article's demo if you want to see the curve.
Carry vs. fees
It's tempting to read carry in isolation. Don't. The GP's total compensation is fees + carry, and on most funds the fee load is material. A 20% carry on a fund with a 2% annual management fee means the GP earns the fee no matter what — and the carry is the upside. A 25% carry on a fund with a 1.25% management fee can actually be more LP-friendly, depending on hold period, because the higher carry only pays out conditional on performance.
For the framing of the full fee load and where it lands in the cascade, read Fund Fee Schedules: A Field Guide.
Why carry exists at all
Outside private funds, asset managers earn an annual fee and nothing else. Carry exists because LP capital in a private fund is long-dated, illiquid, and information-asymmetric — the sponsor controls the deals, the timing, and the disclosures. Carry pays the GP for skill, not just for showing up. A well-structured carry — meaningful pref, real catch-up, enforceable clawback — is the clearest mechanism in the LPA for actually aligning the sponsor's incentives with the LP's outcome.