Carried Interest Calculator

Understanding Carried Interest in Private Equity & Venture Capital

Carried interest, often referred to simply as "carry," is the share of profits that general partners (GPs) of private equity, venture capital, and hedge funds receive as financial compensation. Carry serves as a performance incentive, aligning the interests of fund managers with limited partners (LPs) who supply the investment capital.

How Carried Interest Distribution Works

In standard fund structures, profits are distributed according to a waterfall model:

• Return of Capital: LPs first receive 100% of their initial capital contributions.
• Preferred Return (Hurdle Rate): LPs receive a minimum benchmark return (typically 7% to 8% per annum) before the GP earns any carry.
• GP Catch-up: Once the hurdle rate is satisfied, the GP receives a catch-up distribution (often 100%) until their total share matches the agreed carry percentage of cumulative net profits.
• Profit Split: All remaining profits beyond the catch-up phase are split between LPs and GPs (typically 80% to LPs and 20% to GPs).

Formula for Carried Interest

Under full catch-up provisions, when total net profit $P$ exceeds the preferred return threshold $H = I \times r_h$ (where $I$ is initial investment and $r_h$ is the hurdle rate), the GP carried interest $C$ is calculated as:

$$C = P \times r_c$$

Where $r_c$ represents the carried interest percentage rate (e.g. 20%). If total profits do not exceed the hurdle threshold $H$, carried interest is zero ($C = 0$).