Carried Interest
The general partner's share of a fund's investment profit — commonly 20% — paid as compensation for performance rather than for managing the fund day to day.
Definition
Carried interest, commonly shortened to "carry," is the share of a fund's investment profit that flows to the general partner as performance compensation, distinct from the management fee charged for running the fund. The rate is commonly 20%, sometimes referenced alongside the management fee as part of a "2 and 20" structure, though rates from 10% up to 30% or more appear depending on strategy, vintage, and fund size.
In private-equity and venture-style closed-end funds, carried interest is typically paid out through a distribution waterfall — only after LPs have received back their capital and, commonly, a preferred return, with the GP then catching up to its target percentage of total profit. In open-end hedge-fund-style vehicles, the economically equivalent concept is usually structured and charged as a periodic performance fee directly against NAV, without a formal multi-tier waterfall.
Carried interest is realized profit-sharing, not a guaranteed payment — if the fund never generates profit above the return of its invested capital (and any preferred return), no carry is ever paid, regardless of how long the fund has operated or how large its management fee revenue has been.
Why it matters
Carried interest is the primary mechanism aligning a GP's economic interest with fund performance over the long life of a closed-end vehicle — the GP earns meaningfully more only if LPs' capital is fully returned and grows beyond it. That alignment is also why carry terms (rate, waterfall structure, hurdle) are among the most heavily negotiated points between GPs and anchor LPs.
Because carried interest can be paid on interim profitable exits before a fund's final results are known, provisions like a clawback exist specifically to correct for a GP having been overpaid carry relative to the fund's actual lifetime performance.
Carried interest (straight-carry structure, no waterfall tiers)
This is the simplified formula for a straight profit-share structure with no preferred return or catch-up tiers; funds that run a full distribution waterfall instead route profit through the return-of-capital, preferred-return, and catch-up tiers before this final split applies.
A straight 20% carry on total profit
A crypto fund structured with a straight carry provision (no preferred return, no waterfall tiers) generates $8,000,000 in profit above its LPs' invested capital over the fund's life.
Carried interest is 20% × $8,000,000 = $1,600,000 to the GP, leaving $8,000,000 − $1,600,000 = $6,400,000 of profit — on top of their original capital — to LPs.
Common mistakes
Using "carried interest" and performance fee interchangeably without noting the structural difference — carried interest is the private-equity/venture term for a lifetime, waterfall-gated profit share; a performance fee is the hedge-fund term for a fee charged periodically against NAV, usually without a capital-return waterfall.
Assuming the stated carry rate is what the GP actually nets — a preferred return and catch-up structure, or the absence of one, changes the GP's effective take well below or at the headline percentage.
Overlooking that carried interest, once distributed on an interim profitable exit, may later be subject to a clawback if the fund's overall lifetime performance ends up lower than the performance that justified the earlier carry payment.
Treating carried interest as ordinary fee income for tax purposes without qualification — carried interest is frequently subject to distinct tax treatment in many jurisdictions, a topic outside the scope of this definition and one funds should address with qualified tax counsel.
In practice
Crypto funds structured as venture-style vehicles investing in token or equity positions with multi-year holding periods tend to use carried interest with a full distribution waterfall, much like traditional venture capital. Liquid, actively-traded crypto funds more commonly use the straight-carry or performance-fee model shown above, since there is no natural "exit" event to gate distributions against.
Questions, answered
What is carried interest?
Carried interest is the general partner's share of a fund's investment profit, commonly 20%, paid as performance compensation on top of any management fee.
What is the difference between carried interest and a performance fee?
Carried interest is the private-equity and venture term for a profit share typically paid through a multi-tier distribution waterfall over a fund's life; a performance fee is the hedge-fund term for an equivalent charge computed and paid periodically against NAV, usually without a waterfall.
When is carried interest paid?
Timing depends on the fund structure — some funds pay carry on individual profitable exits as they occur (deal-by-deal), while others wait until all LP capital and any preferred return are returned across the whole fund before any carry is paid.
Can carried interest be taken back from the GP?
Yes, in funds with a clawback provision — if interim carry payments turn out to exceed what the fund's actual lifetime profit would have justified, the GP is contractually required to return the excess.
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