Carried interest, or “carry,” is the share of fund profits allocated to the General Partner (GP) as performance-based compensation. Commonly used in private equity, venture capital, hedge funds, and real estate investment vehicles, carry is designed to align the GP’s incentives with those of the Limited Partners (LPs).

Typically set at 20% of net profits, the carried interest is only paid after certain conditions are met:

Return of Capital: LPs must first be repaid their initial investment.

Fee and Expense Deductions: Operating costs and management fees are deducted from the gross proceeds.

Hurdle Rate: Most funds require a minimum annual return—commonly 7–9%—to be distributed to LPs before the GP becomes eligible for carry.

Only once these thresholds are cleared does the GP receive a portion of the remaining profits, as outlined in the fund’s distribution waterfall. Carried interest structures often include additional performance benchmarks, reinforcing the alignment between fund manager performance and investor outcomes