Carried interest
The manager's share of a fund's profits, paid after LPs get their money back plus a preferred return.
Twenty percent is the traditional figure. Carry is the main way GPs are rewarded for performance and it usually only pays once a fund clears the hurdle rate.
Carry is usually 20 percent, with some top venture managers charging 25 to 30 percent and some large funds or anchor LPs negotiating lower. It is typically paid only after LPs have received their contributed capital and a preferred return, and it is often tiered so the rate rises once the fund passes a target multiple.
Inside the GP, carry is divided among partners and staff through carry points, often with vesting over several years so people who leave early forfeit part of their share. LPs want to see enough carry reach the people doing the work to keep the team together for the life of the fund.
Worked example
A $50M fund returns $125M in total. Ignoring fees for simplicity, profit is $75M and 20 percent carry gives the GP $15M, while LPs receive $110M, a 2.2x multiple on their $50M. If the fund had returned only $50M, there would be no profit and no carry.
Common questions about carried interest
What is a typical carried interest rate?
Twenty percent of profits is the standard figure across venture capital and private equity. Some established venture managers charge 25 to 30 percent, while large funds and big LPs sometimes negotiate it lower.
When is carried interest paid?
In a whole-fund waterfall, only after LPs have received back all their contributed capital plus the preferred return. In a deal-by-deal waterfall it can be paid earlier as individual investments are sold, subject to clawback.