What is carried interest in simple terms?

It is the general partner's share of a fund's profits, the '20' in 2 and 20, almost always 20%. It is how PE professionals are paid for performance beyond salary and the management fee, and it only pays out after investors get their capital back plus a minimum return.

How much is carried interest?

Carry is 20% of profits across virtually all funds, paid after the limited partners receive their capital back and clear the preferred return (commonly 8%). Some top funds command higher carry; the structure, not the headline rate, is what varies most.

When does the GP actually receive carry?

Only on realized gains, and only after the fund's waterfall satisfies its earlier tiers: return of capital, then the preferred return, then a GP catch-up. A clawback can force the GP to return carry if later deals underperform.

What is the difference between carried interest and the management fee?

The management fee (the '2', around 2% of committed capital) funds the firm's operations regardless of performance. Carried interest is performance pay, a share of profits earned only if the fund does well.

Carried Interest (Carry) - How PE Profit Sharing Works

Carried interest, or carry, is the general partner's share of fund profits, the larger half of the classic 2 and 20 economics and almost always 20% of profits. It is how PE professionals are paid for performance, and the central alignment mechanism with the fund's limited partners. Crucially, it pays out only after capital is returned and the hurdle is cleared, so it rewards realized gains, not paper marks.

The 2 and the 20

A fund's economics come in two parts. The management fee (the "2", around 2% of committed capital) is steady pay that funds the firm's operations whether or not deals work. Carried interest (the "20") is the performance half: 20% of profit, earned only if the fund actually makes money. The exhibit above is that split. The first builds the firm; the second is where the wealth is made, which is why carry, not salary, is what most PE careers are really chasing.

Worked example

What 20% of profit means

A fund returns all paid-in capital and then generates $100M of profit above that return of capital. The GP's carry settles at 20% of that profit, $20M, and the LPs keep $80M. How those dollars are actually staged, through the return of capital, the preferred return, and a GP catch-up, is the job of the distribution waterfall (with an interactive calculator).

It is earned, not drawn

Carry is contingent and last in line. It accrues only on realized gains, often vests over years, and can be subject to a clawback that returns overpaid carry to LPs if later deals disappoint. Whether the fund uses a whole-fund (European) or deal-by-deal (American) waterfall changes how soon the GP sees any of it. That ordering and timing live on the distribution waterfall page; what matters here is that carry is performance pay, not a fee.

The common mistake

Treating carry like the management fee: a near-certain percentage that simply accrues. It is not. The fee is paid regardless; carry is earned only after LPs are made whole and the fund clears its hurdle, and it can be clawed back. Reading a headline "20%" as guaranteed income misunderstands the risk the GP is actually taking.