Carried interest
Also called Carry, Performance allocation
Carried interest is the share of a fund's profits allocated to the manager as performance compensation, paid only after investors have received the returns that rank ahead of it in the distribution waterfall.
Twenty percent is the long-standing convention, though it varies. Carried interest is distinct from the management fee: the management fee is charged regardless of performance and pays for running the fund, while carried interest is contingent and is meant to align the manager with investors.
The alignment only holds if the waterfall is honest. Carry that sits above return of capital, or that is calculated deal by deal without a clawback, can pay the manager on gains that the fund as a whole never realised.
For investors, the practical question is not the carry percentage in isolation but the combination of carry rate, the hurdle it sits above, the catch-up mechanics, and whether a clawback exists.
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