Carried interest
Carried interest is the general partner's share of a fund's profits, typically 20%, paid through the distribution waterfall only after limited partners have received their contributed capital and, usually, a preferred return.
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Example
A fund returns $150M on $50M of contributed capital. After returning the $50M and an 8% preferred return, the remaining profit is split 80% to LPs and 20% to the GP through the waterfall.
Confused with
Management fee. Paid every year regardless of performance. Carry is paid only out of profit.
Related terms
- Distribution waterfall A distribution waterfall is the sequence in which a fund's proceeds are allocated between limited partners and the general partner, typically return of contributed capital first, then a preferred return to LPs, then a catch-up to the GP, then the remaining profit split at the carried interest rate.
- Hurdle rate (preferred return) The hurdle rate, also called the preferred return, is the annual return, commonly 8%, that limited partners must receive on their contributed capital before the general partner is entitled to carried interest in the distribution waterfall.
- Management fee The management fee is an annual charge paid by the fund to the management company, typically 2% of committed capital during the investment period, often stepping down afterwards to a lower rate or a basis of invested capital, to cover salaries, rent and the cost of running the firm.