Carried interest (commonly called “carry”) is the GP’s share of the fund’s investment profits. The standard structure across private equity and venture capital is 20% of profits, with the remaining 80% going to LPs. This 20/80 split has been the industry norm for decades, though some high-demand managers charge 25% or even 30%, and some emerging managers offer reduced carry to attract early LPs.
Carry does not kick in immediately. Most fund structures include a preferred return (or “hurdle rate”), typically 8% annually, that LPs must receive before the GP earns any carry. The logic is straightforward: the GP should not share in profits until LPs have earned a baseline return on their committed capital. Once the hurdle is cleared, a “catch-up” provision usually allows the GP to receive a larger share of subsequent distributions until the GP has received their full 20% of total profits. After the catch-up is complete, distributions revert to the standard 80/20 split.
The distribution waterfall, the order in which fund profits flow between LPs and the GP, is one of the most negotiated sections of any LPA. There are two main models. A “deal-by-deal” (or American) waterfall allows the GP to earn carry on individual profitable investments as they are realized. A “whole fund” (or European) waterfall requires the GP to return all LP capital and the preferred return across the entire fund before any carry is paid. Whole-fund waterfalls are more LP-friendly and increasingly the expectation, especially from institutional allocators. As an emerging manager, offering a whole-fund waterfall can reduce friction in LP negotiations.
One more structural element: the GP clawback. If a fund pays carry early on strong exits but later investments underperform, the GP may have received more carry than they were entitled to on a cumulative basis. The clawback provision requires the GP to return that excess carry to LPs at the end of the fund’s life. Clawback obligations are personal to the GP principals in many fund structures, which is another reason the GP commitment and carry mechanics need careful legal structuring from day one.
Frequently Asked Questions
How is carried interest calculated?
Carry is typically 20% of fund profits, but it only kicks in after LPs receive their preferred return (usually an 8% annual hurdle). Once the hurdle is cleared, a catch-up provision lets the GP receive a larger share until they have their full 20%, then distributions revert to the standard 80/20 LP/GP split.
What is the difference between a deal-by-deal and whole-fund waterfall?
A deal-by-deal (American) waterfall lets the GP earn carry on individual profitable exits as they happen. A whole-fund (European) waterfall requires all LP capital plus the preferred return to be returned across the entire fund before any carry is paid. Institutional LPs increasingly expect whole-fund waterfalls.
What is a carry clawback?
If early strong exits trigger carry payments but later investments underperform, the GP may have received more carry than they earned on a cumulative basis. The clawback provision requires the GP to return that excess to LPs at end of fund life. Clawback obligations are often personal to the GP principals.
