---
title: "Carried Interest"
url: "https://mahouse.world/glossary/carried-interest"
type: "glossary term"
topic: "Funds"
author: "Ihor Vlasov"
reviewed: "2026-09-20"
published: "2026-08-10"
---

# Carried Interest

Carried interest is the share of a fund's profits — typically 20% — that its general partner receives once the limited partners have got their capital back and, usually, a preferred return; it is the manager's reward for performance, distinct from the management fee that pays the firm's costs. It is where the partners of private equity and venture firms make their money, why the fund structure exists, and a tax question in every jurisdiction that has one.

**Also known as:** Carry, Performance fee, Promote

## Key facts

- **Used at:** every private equity, venture, growth, credit and infrastructure fund; also in deal-by-deal structures, angel syndicates (the lead's carry) and real estate (the "promote")
- **Binding:** the limited partnership agreement sets the percentage, the hurdle, the waterfall (whole-fund or deal-by-deal), the catch-up and the clawback
- **Typical terms:** 20% of profits; an 8% preferred return (the hurdle) to LPs first; a GP catch-up so that the GP receives 20% of total profits once the hurdle is passed; a clawback if later losses mean the GP was overpaid; venture funds often have no hurdle, top firms charge 25–30%
- **Typical arithmetic:** a €500m fund returning €1.25bn has €750m of profit; at 20% the carry is €150m, split among the firm's partners over the fund's life
- **Parties:** the general partner's partners (who receive it), the limited partners (who pay it), and the tax authorities, who in most countries treat it as a capital gain rather than income — contested for decades

## How carried interest works in practice

A €500m buy-out fund invests over five years and sells its companies over the next five, returning €1.25bn in all. The waterfall in the partnership agreement decides who gets what in what order. European whole-fund waterfall: the LPs receive all distributions until they have their €500m back plus an 8% a year preferred return; then the GP receives a catch-up — all or most distributions until it has 20% of the profit so far; then every further euro is split 80/20. American deal-by-deal waterfall: the GP takes carry on each profitable exit as it happens, subject to a clawback at the end of the fund if the losers mean it took too much. The difference is timing — deal-by-deal pays the partners years earlier — and LPs have pushed the market toward whole-fund since 2010.

The hurdle exists so the GP is paid for outperformance, not for the passage of time; the catch-up exists so the GP's 20% is of the whole profit, not just the profit above the hurdle. The clawback, secured by escrow or the partners' guarantees, exists because deal-by-deal carry on early winners can exceed 20% of a fund's final profit.

The tax treatment — carry as capital gain, taxed at lower rates than salary — has been argued in the US, UK and EU for twenty years; reforms have narrowed it in some places and left it in others, and every fund's structure is drafted around the answer in its jurisdiction.

## Example

A €500m fund with a whole-fund waterfall, 8% hurdle, 100% catch-up and 20% carry returns €1.25bn over ten years. The LPs receive their €500m plus the preferred return — about €260m compounded over the fund's cash-flow profile — first: €760m. The GP's catch-up then takes distributions until it holds 20% of the total profit to date: with €750m of total profit the GP's entitlement is €150m, so the catch-up runs to €150m. Once the catch-up is complete the GP holds 20% of the profit to date, and every further euro is split 80/20. In total over the fund's life: LPs €1.1bn (2.2× their money), GP €150m. The firm's six partners share the €150m by their carry points over the years the exits arrive; the partner who joined in year six holds points only in the next fund.

## Common mistakes

- LPs comparing funds on the carry percentage alone and ignoring the waterfall and the hurdle.
- A deal-by-deal waterfall with a clawback nobody can enforce because the partners have spent the money.
- Junior partners promised carry points that vest after they leave.
- Founders and angels using "carry" for their share of a syndicate without the waterfall terms that make it work.
- Structuring for a tax treatment that the next budget removes.

## Related terms

- [General Partner](https://mahouse.world/glossary/general-partner.md)
- [Limited Partner](https://mahouse.world/glossary/limited-partner.md)
- [Hurdle Rate](https://mahouse.world/glossary/hurdle-rate.md)
- [Private Equity](https://mahouse.world/glossary/private-equity.md)
- [Venture Capital](https://mahouse.world/glossary/venture-capital.md)
- [Management Buy-Out](https://mahouse.world/glossary/management-buy-out.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-20. https://mahouse.world/authors/ihor-vlasov