Full Definition
Carried interest (or "carry") is the share of investment profits that fund managers (general partners) receive as their primary performance-based compensation. In venture capital, the standard carry is 20% of fund profits, paid after returning the invested capital to limited partners.
How Carry Works
- Standard carry: 20% of profits (the "2 and 20" model)
- LPs receive their capital back first (the "return of capital")
- After capital return, profits split 80% to LPs, 20% to GPs
- Some funds have a "hurdle rate" — a minimum return before carry kicks in
- Top-performing funds may negotiate higher carry (25-30%)
Carry Distribution
Carry is typically distributed among the general partners, with the lead partner receiving the largest share. Junior partners and principals may receive a smaller allocation of the carry pool.
Real-World Example
A VC fund invests $100M and returns $400M. After returning $100M capital, the $300M profit is split: $240M to LPs (80%) and $60M carry to GPs (20%).
Related Terms
The managing partner(s) of a venture fund who make investment decisions and manage the portfolio.
An investor who contributes capital to a venture fund but does not participate in day-to-day management.
A form of private equity financing provided by firms to startups with high growth potential.
The share of investment profits (typically 20%) that fund managers receive as performance compensation.
Investment firms that acquire stakes in or buy out mature companies to improve operations and resell at a profit.
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