How Carried Interest Works
Carried interest is the share of a fund's profits that the general partner (GP) earns as performance-based compensation. In the standard "2-and-20" model, fund managers charge a 2% annual management fee on committed capital plus 20% of profits above a preferred return hurdle.
Preferred Return and the Hurdle Rate
Before the GP earns any carry, limited partners (LPs) must first receive their preferred return, typically 8% compounded annually. This hurdle ensures the GP only participates in profits after LPs achieve a minimum threshold. If the fund's total profit does not exceed the hurdle amount, the GP earns zero carry regardless of the carry percentage.
Catch-Up Provision
Many fund agreements include a catch-up clause. Once LPs receive their preferred return, the GP receives 100% of additional profits until they've "caught up" to their agreed carry split. After the catch-up is satisfied, remaining profits are split according to the carry percentage. This calculator uses a simplified model without catch-up to show the base economics. Actual carry structures vary by fund.
European vs. American Waterfall
The distribution waterfall determines when carry is paid. In a European (whole-fund) waterfall, carry is calculated on total fund performance after all capital is returned to LPs. In an American (deal-by-deal) waterfall, carry is calculated on each realized investment individually, which can result in earlier carry payments to the GP. For detailed waterfall modeling, see the Waterfall Distribution Calculator.
This calculator uses a simplified European waterfall model. Actual carried interest structures vary by fund and are governed by the limited partnership agreement (LPA). The 20% carry / 8% hurdle "2-and-20" structure remains the industry standard, though emerging managers may negotiate different terms. Consult your fund counsel for specific calculations.
