What is carried interest? Definition, how it works and examples
The manager’s share of the profit, not a fee on the money: how carry is calculated, where it sits in the waterfall and what it costs you on a real exit.
The short answer
Carried interest, explained simply, is the manager’s share of an investment’s profit — by market convention 20% — paid to whoever runs a fund or an SPV only after investors have their capital back and, in many funds, a minimum return on it. It is a share of the gain, not a fee on the money invested. What a carry percentage costs you depends on three terms around it: whether there is a hurdle, whether the manager catches up after it, and whether profit is measured across a whole fund or deal by deal.
What type of fee is carried interest?
Economically, it is a performance fee. Legally, in most funds and SPVs it is not a fee at all: it is an allocation of the vehicle’s profits to the general partner or managing member, written into the partnership or operating agreement. That is the carried interest definition the tax code works from, and the reason carry is taxed differently from pay. It sits beside the management fee, and the two do different jobs. The management fee — often 1–2% a year of committed or invested capital, in ILPA’s description — pays for running the vehicle whether or not it makes money.
Private equity carried interest explained: hurdle, catch-up and clawback
What is carried interest in a fund, as opposed to a single deal? The same profit share, wrapped in three mechanisms that decide the real rate. The carried interest meaning in private equity and venture funds is only complete with all three. Hurdle, or preferred return A hurdle is a minimum return investors receive before any carry is paid — 8% a year in most funds ILPA sampled, usually compounding. Under a “hard hurdle”, carry applies only to profit above it. Under a soft hurdle followed by a catch-up, a good outcome only delays carry rather than reducing it.
Carried interest waterfall explained, on an illustrative exit
A distribution waterfall is the order in which proceeds are paid out. Here is a carried interest calculation on one position: investors put in $10M, fees included, and the position is sold after five years. Terms: 20% carry, an 8% simple annual hurdle, a 100% catch-up. Two outcomes — a sale returning $25M, and one returning $13M. At $25M the hurdle changes nothing: the catch-up restores the manager to 20% of the $15M profit. At $13M it decides everything: the $3M profit sits inside the hurdle, so no carry is paid, where a no-hurdle structure would take $0.6M.
Carried interest rules and conventions, as of October 2026
How and when is carried interest taxed?
Because carry is an allocation of the vehicle’s profit, a US manager is generally taxed on it as the gain it is made of, in the year the vehicle realises that gain. Under IRC §1061, applying to tax years beginning after 31 December 2017, gain on a carried interest counts as long-term only where a three-year holding period is met; the excess is treated as short-term. Why this treatment is contested, and what it is worth, is covered in the carried interest loophole.
Common mistakes when reading a carry clause
Comparing rates without the base 20% of profit net of fees and 20% of gross profit are different prices. Assuming every vehicle has a hurdle Many do not. Check the documents rather than the fund-market convention. Missing the catch-up A hurdle followed by a full catch-up protects only a modest outcome. Treating carry as a cost on your money It is a share of profit. With no gain, there is no carry; the management fee is charged either way. Netting across separate SPVs Each vehicle settles its own carry. Losses in one do not reduce carry in another.
The terms this page uses
Carried interest (carry) The manager’s share of a vehicle’s realised profit, paid after investors’ capital — and any hurdle — is returned. General partner The manager of a fund or SPV, and the carried interest partner: the party the profit share is allocated to. Hurdle (preferred return) The minimum return investors receive before carry is paid. Usually 8% a year in funds, often compounding; absent in some vehicles. Catch-up The tier after the hurdle in which the manager receives most or all distributions until it holds its full carry share of profit.
Questions about carried interest
What is a carried interest, in simple terms? It is the manager’s cut of the profit — typically 20% by market convention — paid only after investors get their money back, and in many funds a minimum return too. If the investment does not make a profit, there is no carry. Do I pay carry if the investment loses money? No. Carry is paid only out of realised profit. The management fee and the vehicle’s own expenses are charged whether or not there is a gain, which is why they matter more in a poor outcome. How does carry differ in an SPV and in a fund?
What is a carried interest, in simple terms?
It is the manager’s cut of the profit — typically 20% by market convention — paid only after investors get their money back, and in many funds a minimum return too. If the investment does not make a profit, there is no carry.
Do I pay carry if the investment loses money?
No. Carry is paid only out of realised profit. The management fee and the vehicle’s own expenses are charged whether or not there is a gain, which is why they matter more in a poor outcome.
How does carry differ in an SPV and in a fund?
A fund can net gains against losses across its deals before carry is paid, if it uses a whole-fund waterfall. A single-deal SPV holds one company, so carry is measured on that one position, and each SPV you hold settles its carry separately.
What carry does Axevil charge?
It is set per deal and written in that SPV’s documents, together with the other fee lines, and you read them before you commit. There is no single rate across deals.
When is carried interest taxed?
For a US manager, generally in the year the vehicle realises the gain it is allocated from. Under IRC §1061 it is long-term capital gain only where a three-year holding period is met. The details are on the carried interest loophole page.
Where the figures on this page come from
Figures and rules were last verified on 1 October 2026. Market conventions are from ILPA’s published survey of fund terms and describe funds, not any particular SPV. The waterfall examples are illustrative. Tax rules are US federal; other jurisdictions differ.