Carried Interest (Carry)
Private Equity glossary · Private Equity Fundamentals
Definition
The GP's share of fund profits — conventionally 20% of profits above an 8% preferred return ('hurdle'), paid through the distribution waterfall after return-of-capital and the GP catch-up tier. U.S. tax treatment: carry has historically been taxed as long-term capital gain (20% LTCG + 3.8% NIIT) rather than ordinary income, subject to a 3-year holding-period requirement post-TCJA (§1061). Subject to clawback at fund termination if cumulative carry distributions exceed 20% of net fund profits.
Carried Interest (Carry) in plain English
Carried interest, or 'carry,' is how fund managers get rich when their bets pay off: they typically keep 20% of the profits, but only after investors first earn back everything they put in plus a guaranteed minimum return (often 8%, called the hurdle). It's the performance bonus that makes private equity so lucrative — like a fishing guide who takes a cut only of the fish caught above a promised quota. In the U.S. it's been taxed at the lower long-term capital-gains rate instead of the higher rate on ordinary salary, which is politically controversial, and managers must hold investments at least 3 years to qualify. There's also a safety valve called clawback: if managers were overpaid early on, they must give money back when the fund closes so they never walk away with more than their fair 20% share.
Also called: Carry
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