Sign inWhat is carried interest?
Carried interest is the share of fund profits, typically 20% above a preferred return, paid to the general partner as performance compensation.
Carry = carry rate x profits above the preferred return
How practitioners use it
Carry is the mechanism that aligns a general partner with its limited partners. No profit above the hurdle means no carry, regardless of how much capital was deployed.
The mechanics matter more than the headline rate. Whether the hurdle is hard or soft, whether there is a catch-up, and whether carry is calculated deal by deal or across the whole fund can change the payout materially.
Buy-side compensation questions in interviews are usually really questions about whether you understand this waterfall.
Worked example with round numbers
01
A fund returns 200 on 100 of paid-in capital, so profit is 100.
02
With an 8% preferred return satisfied first, remaining profit splits 80/20.
03
The general partner earns roughly 20 of carry and limited partners keep the rest.
Where people get it wrong
- Assuming carry is paid on total proceeds rather than on profit above the hurdle.
- Ignoring the catch-up, which accelerates general partner participation after the preferred return.
- Forgetting clawback provisions in deal-by-deal structures.
Learn it by using it
Definitions stick once you have run the numbers yourself. The desk below is free and needs no signup.
Visualise the waterfall