Carried Interest

Carried interest is the primary way fund managers — formally called general partners, or GPs — participate in the upside of the investments they manage. Rather than collecting a fee purely for time spent, the GP earns a percentage of the profits generated above an agreed threshold. This structure is intended to align the manager's financial outcome with that of the investors, known as limited partners or LPs.

The threshold the fund must clear before carry kicks in is often called the preferred return or hurdle. Only profits above that hurdle are subject to the carry calculation. A hypothetical growth-equity fund might require the fund to first return all invested capital plus a preferred annual return before the GP receives any carry at all.

Carry is common across private equity, private credit, hedge funds, and real asset strategies. Families evaluating manager selection often look at both the carry percentage and the waterfall structure together, since a high carry rate means little if the hurdle is set generously in the investor's favor.

A frequent source of confusion is the distinction between carry and a management fee. Management fees are typically charged annually on committed or invested capital and cover operating costs regardless of performance. Carry is purely a profit-sharing mechanism. Tax treatment of carried interest varies by jurisdiction and can be complex — families should work with qualified attorneys and CPAs to understand the implications before investing.