What is carried interest and how does it work?

Carried interest is the performance fee that general partners (GPs) earn on a venture capital fund. It's typically set at 20% of the fund's profits — meaning after LPs get their invested capital back, the GPs take 20 cents of every dollar of profit. The other 80 cents goes to the LPs.

Carry is only paid after the fund returns the LPs' full capital commitment — this is called the hurdle or preferred return. Some funds have an explicit hurdle rate (e.g., 8% annualized return) that must be met before carry kicks in. Others simply require return of invested capital first.

Here's a simple example: a $100M fund invests all its capital and ultimately returns $300M. The profit is $200M. The GPs take 20% of that profit, or $40M in carry. The remaining $160M plus the original $100M capital goes to LPs.

Carry is usually split among the GP partners according to a carry allocation agreement — founding partners typically get the lion's share, with junior partners and associates getting smaller slices. At successful funds, carry can be worth tens or hundreds of millions of dollars per partner.

An important nuance: carry is typically earned at the fund level, not deal by deal. This means GPs only collect carry after the overall fund is profitable, even if individual investments were home runs. This protects LPs from overpaying carry on winners while ignoring losers — though some funds use deal-by-deal structures with clawback provisions.