Carried Interest

Carried interest, or carry, is the performance-based compensation of a private fund’s general partner. It is defined in the LPA and paid through the distribution waterfall, usually after limited partners have received their contributed capital and a preferred return at the hurdle rate.

Accounting for carry involves two measures. Accrued (or hypothetical) carry is calculated at each reporting date as if the fund were liquidated at current NAV, and is shown in the GP’s and LPs’ capital accounts. Realized carry is actually distributed when proceeds flow through the waterfall. Clawback provisions require the GP to return carry if, at the end of the fund’s life, it has received more than its entitlement.

Pitfalls include applying the wrong waterfall type (European versus American), ignoring management-fee offsets or fee waivers, inconsistent treatment across parallel vehicles, and not tracking the after-tax clawback position. Carry is the closed-ended-fund counterpart of the performance fee used in open-ended funds.

Example

A $100M fund returns $180M in total distributions, a profit of $80M. With a 20% carry and full catch-up, the GP receives $16M of carried interest and LPs receive $164M.