Carried interest: definition, how it works & how it’s calculated
Carried interest, or “carry,” is the share of a fund’s profits paid to the fund manager as performance compensation, typically after investors have received back their original capital plus a minimum return. It is the primary way private fund managers get paid for actually generating returns, as opposed to simply managing assets.
Carried interest is often what draws investors into fund management in the first place, since a manager’s personal upside is directly tied to how well the fund’s underlying investments perform.
What is carried interest?
Carried interest aligns the fund manager’s incentives with investor outcomes: managers only earn meaningful carry if the fund performs well. It’s standard in private equity and venture capital, most commonly set at 20% of profits, though this can vary by fund and strategy, sometimes ranging from 15% to 30% for top-performing managers.
How does carried interest work?
Most funds pay carried interest only after a “hurdle rate,” a minimum return often set at 8% annually, is met, ensuring investors receive a baseline return before the manager participates in profits. Distribution then typically follows a set order, or distribution waterfall, that determines how proceeds are split between investors and the manager.
Carried interest calculation
A simplified calculation: if a fund returns $150 million on $100 million invested, and the manager’s carry is 20% above an 8% hurdle, the manager earns 20% of profits exceeding the hurdle amount, with the rest going to investors.
Example walkthrough:
- Capital invested: $100 million
- Total fund value at exit: $150 million
- Profit: $50 million
- Hurdle (8% annually, simplified as a single period here): $8 million
- Profit above hurdle: $42 million
- Manager’s carry (20% of $42 million): $8.4 million
- Remaining profit to investors: $33.6 million, on top of their $8 million preferred return and original $100 million
Final thoughts
Carried interest is why fund managers are willing to spend a decade sourcing, supporting, and exiting private investments: their real compensation shows up only when investors also win. Understanding the hurdle and waterfall mechanics behind it explains a lot about why fund terms are negotiated so carefully.
Want to keep learning? Explore Augment’s network, see what’s new in Collective, browse The Power 20, and keep up with the private market with the Pulse.
Disclaimer
This content is for informational and educational purposes only. It does not constitute investment advice, legal advice, or a recommendation to buy or sell any security or to pursue any specific investment strategy.
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Paul leads editorial at Augment, building Pulse into the private markets' go-to intelligence source. He also develops editorial content strategies for startups and venture capital firms. Previously, he spent 15 years as a business and opinion journalist at The New York Times, Fortune, Fast Company, Reuters, and more. He believes transparency creates liquidity—and that someone should actually publish what private shares are trading for. He lives in Marin with his wife and two rescue dogs, and wishes he had more time to surf.
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