Calculate the carried interest earned by fund managers from a fund's profits above a preferred return hurdle rate.
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Private Equity
Carried interest (carry) is the share of a fund's profits paid to the general partner (GP) after returning committed capital and meeting a preferred return hurdle. It is the primary performance incentive in private equity and venture capital.
In a typical fund structure, limited partners (LPs) provide capital and the GP manages investments. The GP earns a management fee (usually 1.5–2% of committed capital) plus carried interest — typically 20% of profits above a hurdle rate.
Carry aligns GP incentives with LP returns: the GP only earns carry if the fund performs well enough to exceed the preferred return threshold.
The European (whole-fund) waterfall calculates carry on total fund returns.
Carried Interest = (Total Distributions − Committed Capital − Hurdle Amount) × Carry %
Hurdle Amount = Committed Capital × Preferred Return %. Carry only applies to profits exceeding the hurdle.
100M committed, 180M distributed, 8% preferred return, 20% carry. Profit = 80M. Hurdle = 8M. Profit above hurdle = 72M. Carry = 72M × 20% = 14.4M. LP net share = 180M − 14.4M = 165.6M.
This calculator models a simplified European waterfall without a GP catch-up provision or clawback mechanism. American (deal-by-deal) waterfalls calculate carry differently. Real fund agreements include complex provisions for recycling, management fee offsets, and preferred return compounding.
Frequently asked questions
20% is the industry standard (the “2 and 20” model: 2% management fee + 20% carry). Top-performing funds may negotiate higher carry (25–30%), while emerging managers sometimes offer lower carry to attract LPs.
The minimum annual return LPs must receive before the GP earns any carry. Typical hurdles range from 6% to 10%. It protects LPs from paying carry on mediocre performance.
European (whole-fund) waterfalls calculate carry on total fund performance — carry is only paid after all capital is returned plus the hurdle. American (deal-by-deal) waterfalls allow carry on individual profitable deals, even if other deals lost money, subject to a clawback.
In the US, carried interest is generally taxed as long-term capital gains if the underlying investments are held for more than three years (per the Tax Cuts and Jobs Act 2017). This is a significant tax advantage over ordinary income rates, though the treatment is politically debated.
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