Carried Interest Calculator
Enter your fund size, total proceeds, hurdle rate, and carry percentage to see exactly how profits are split between limited partners and the general partner. The calculator works through the full four-tier waterfall: return of capital, preferred return, GP catch-up, and final profit split. Results update as you type.
What is carried interest?
Carried interest (commonly called "carry") is the share of a fund's investment profits that flows to the general partner (GP) as a performance fee. It is the primary economic incentive for private equity, venture capital, and hedge fund managers. Rather than charging a flat fee on assets, the GP only earns carry if the fund delivers returns above a minimum threshold, aligning the GP's incentives with those of the limited partners (LPs). The industry standard is 20% carry, meaning the GP takes 20 cents of every dollar of profit above the hurdle. This structure, combined with a 2% annual management fee, gives rise to the phrase "2 and 20" that has defined alternative asset management for decades.
How the four-tier waterfall works
A carried interest waterfall defines the sequence in which fund proceeds are distributed. The standard model has four tiers. Tier one returns all LP capital before any profit sharing occurs. Tier two pays LPs their preferred return, which is the hurdle rate compounded over the fund life on their contributed capital. Eight percent per year is the most common hurdle in private equity. Tier three is the GP catch-up, where the GP receives an accelerated share of profits (often 100%) until their cumulative distributions equal the carry percentage of total profits including the preferred return. Tier four splits remaining profits at the negotiated carry percentage, typically 80% LP and 20% GP. Understanding which tier distributable proceeds fall into determines exactly how much carry accrues.
European vs American waterfall methods
The European (whole-fund) method requires the GP to return all LP capital and preferred return across every investment before carry is paid. This protects LPs from paying carry on early winners while later deals underperform. The American (deal-by-deal) method allows the GP to take carry on each profitable realization, even if the overall fund has not yet cleared its hurdle. American structures are more favorable to GPs and create clawback risk: if later deals lose money, the GP may need to return previously distributed carry. Most large buyout funds use the European method, while venture capital funds have historically used American structures. This calculator models both approaches conceptually, with the European model as the recommended default.
GP catch-up provisions explained
Without a catch-up, after LPs receive their preferred return, all remaining profit is split proportionally at the carry rate. A catch-up provision allows the GP to first receive a larger share of incremental profits until their total distributions equal carryPct% of all profits distributed above the return of capital. At a 100% catch-up rate, every dollar of profit above the hurdle goes entirely to the GP until they "catch up" to their target split. At a 50% catch-up rate, each additional dollar is split 50% GP and 50% LP until the same endpoint is reached. The net economic effect is the same if there is enough profit - the catch-up just determines how quickly the GP reaches their target percentage. Catch-up provisions are standard in institutional PE and significantly affect timing of GP cash flows.
Typical carried interest structures by fund type
| Fund type | Carry rate | Hurdle rate | Catch-up | Waterfall |
|---|---|---|---|---|
| Buyout (large-cap PE) | 20% | 8% | 100% | European |
| Buyout (mid-market PE) | 20% | 6-8% | 100% | European or American |
| Venture capital | 20-25% | 0-8% | 0-100% | American or European |
| Growth equity | 20% | 8% | 100% | European |
| Hedge fund | 20% | 0% (HWM) | N/A | Annual reset |
| Real estate PE | 15-20% | 6-10% | 50-100% | European |
| Infrastructure | 10-15% | 7-9% | 100% | European |
| Credit/distressed | 15-20% | 7-10% | 100% | European |
Industry-standard terms vary by fund strategy and vintage. These are common benchmarks, not universal rules.
Frequently asked questions
What is the typical carried interest rate?
The industry standard is 20% of profits above the hurdle rate. Some top-tier venture capital and buyout funds negotiate 25% or even 30% carry based on their track record. Infrastructure and real estate funds often use lower rates of 10-15%. Emerging managers may accept 15% to attract LPs. The carry rate is almost always negotiated as part of the fund's limited partnership agreement before capital is raised.
How does the hurdle rate affect carried interest?
The hurdle rate (also called the preferred return) is the minimum annual return LPs must earn before any carry accrues. An 8% hurdle means LPs receive all proceeds until they have earned 8% per year on their invested capital, compounded over the fund life. If the fund does not clear the hurdle, the GP receives no carry at all. The higher the hurdle rate, the more favorable it is for LPs. Some funds use a simple (non-compounding) hurdle; this calculator uses compound preferred returns, which is more common in PE.
What is a GP catch-up provision?
A catch-up provision allows the GP to receive a disproportionately high share of profits after the LP preferred return has been paid, until the GP's cumulative distributions equal their target carry percentage of total fund profit. At 100% catch-up, all profits above the hurdle go to the GP until they have "caught up." Once the GP reaches their target, remaining profits split at the standard carry percentage. Not all funds have catch-ups: some VC funds go straight to the carry split after the hurdle, effectively reducing the GP's effective carry rate.
What is a clawback provision?
A clawback provision requires the GP to return previously paid carry if, at the end of the fund's life, they have received more carry than they were ultimately entitled to. Clawbacks most commonly arise in American (deal-by-deal) waterfall structures where the GP took carry on early wins but the fund later realized losses. European waterfall structures eliminate most clawback risk because carry cannot be paid until the entire fund has cleared its hurdle. This calculator uses the European whole-fund model as the default.
Is carried interest taxed as capital gains or ordinary income?
In the United States, carried interest on investments held more than three years qualifies as long-term capital gains under Section 1061 of the tax code (added by the Tax Cuts and Jobs Act of 2017), taxed at a maximum federal rate of about 23.8% (20% plus the 3.8% net investment income tax). Investments held one to three years are taxed at higher short-term rates. This compares favorably to the 40.8% maximum rate on ordinary income, and has made carried interest taxation a recurring topic of tax policy debate. Tax rules vary internationally, and LPs and GPs should consult their own tax advisers.
What is the difference between carry and a management fee?
A management fee is a periodic charge on committed or invested capital (typically 1.5-2% per year) that covers fund operating expenses and pays base salaries regardless of performance. Carried interest is earned only on profits above the hurdle rate, and is the performance-linked component of GP compensation. The management fee is certain income; carry is uncertain and depends entirely on the fund generating returns above the preferred return threshold. The "2 and 20" shorthand refers to a 2% management fee and 20% carry.
How is fund MOIC different from IRR?
MOIC (Multiple on Invested Capital) measures total value returned as a multiple of total capital invested, ignoring the time dimension. A 2.0x MOIC means investors received two dollars back for every dollar invested. IRR (Internal Rate of Return) is the annualized return that accounts for the timing of cash flows, making it comparable across investments of different durations. A 2.0x MOIC over five years is approximately a 15% IRR, while the same 2.0x over ten years is approximately a 7.2% IRR. Both metrics are used in PE; IRR is more commonly cited in fund reporting because it normalizes for hold period.