Carry / carried interest
Carry is shorthand for carried interest: the manager’s incentive share of investment profit under the agreement. It is separate from management fees and the return on the GP’s own capital.
Start here · Shared mechanics
GP / LP waterfall calculator
See who funds an investment, how a preferred return works, and how carried interest changes the split. A visual, step-by-step GP/LP calculator.
What does every GP/LP structure have in common?
The GP manages the investment and may invest alongside the LPs. LPs supply capital. Their agreement defines which dollars get returned first, when performance compensation begins, and how the remaining proceeds are shared. A waterfall is that payment order, not a promise of returns.
Your investment lab
Make the deal. Follow every dollar.
Start with a preset, then change any input. Your numbers stay in this browser unless you share them.
01 / Sources & uses
What needs to be funded?
$
$
Exclude the separately entered sponsor fee.$
Assumed fully spent; add unused cash to retained cash at exit.$
Funded as a use of cash. Gross sponsor revenue, separate from promote.$
Enter the loan payoff separately in step 2.%
Percentage of total partner capital.LPs
Used only to show an illustrative check size.Partner equity required
$10.00M
$10,000,000 of total uses − $0 of debt = $10,000,000 of equity.
- LP capital$9,000,000
- GP capital$1,000,000
- Debt$0
Each LP contributes$1.00M9 equal LPs
Debt / total cost0.0%Cost includes all modeled uses
| Initial investment | $10,000,000 |
|---|---|
| Improvements / spent reserves | $0 |
| Other costs | $0 |
| Closing sponsor fee | $0 |
| Total uses | $10,000,000 |
02 / Economics
Define the agreement
years
Baseline: all payments at this year-end. Step 5 can move a portion earlier.% per year
%
Exit assumptions
$
%
$
Includes any accrued debt due.$
After all operating costs, capex, interest, debt service, and ongoing fees. No prior distributions.Before the partners split anything
$18.00M available to distribute
Gross sale value$18,000,000
Less: selling costs-$0
Add: retained net cash$0
Less: debt paid-$0
Available to equity$18,000,000
Read a residual dollar correctly
Before any higher tier, the GP receives 28.0% in total of a residual dollar: 10% as a co-investor plus 18.0% as the incentive allocation. LPs receive the balance.
Capital and the preferred return are paid before this residual split.
- LP share of $100$72
- GP co-investment share$10
- GP incentive share$18
Baseline: cash at exit
Steps 1–4 hold property cash until final exit. Step 5 compares an earlier payment and updates unreturned capital and preference balances. Recurring distributions and refinancing debt schedules need a more detailed model.
03 / Distribution waterfall
Who gets what?
Total distributed$18.00Mat year 5
- LP proceeds$15.48M
- GP co-investment$1.80M
- GP carry / promote$720,000
Manager fee revenue: $0
Already funded in the budget. Separate from exit distributions and from carry. Business expenses and taxes are not deducted, so this is not manager profit.
Class challenge: predict before you look
Under these inputs, does the GP receive any carry?
Distribute cash in this order
Each bar is a payment tier. Teal goes to LPs, gold to the GP’s invested capital, and purple to the performance allocation.
- 1. Return invested capital$10,000,000
Capital comes back in proportion to contributions, up to available cash.
- 2. Pay the preferred return$4,000,000
8% simple annual accrual on each funded contribution; not a guaranteed payment.
- 3. Split the remaining profit$4,000,000
LPs keep the balance after the incentive allocation; GP co-investment remains separate.
| Tier | LPs | GP co-investment | Carry / promote |
|---|---|---|---|
| 1. Return invested capital | $9,000,000 | $1,000,000 | $0 |
| 2. Pay the preferred return | $3,600,000 | $400,000 | $0 |
| 3. Split the remaining profit | $2,880,000 | $400,000 | $720,000 |
| Total | $15,480,000 | $1,800,000 | $720,000 |
LPs + GP co-investment + carry = $18,000,000. Every dollar accounted for.
04 / Risk & reward
Change the outcome
Move the exit value and see who absorbs the downside and earns the upside.
$
Debt and other assumptions remain unchanged.The same investment, different agreements
Keep capital, fees, timing, and proceeds fixed. Change only the incentive structure. Catch-up uses a 100% allocation for this comparison.
| Structure | LP proceeds | GP carry | LP multiple |
|---|---|---|---|
| No carry | $16,200,000 | $0 | 1.80x |
| Hurdle; no catch-up | $15,480,000 | $720,000 | 1.72x |
| Hurdle + full catch-up | $14,760,000 | $1,440,000 | 1.64x |
What if the equity pool returns less—or more?
Illustrative available cash before carry as a multiple of all partner contributions. These are scenarios, not probabilities. Fees and capital stay fixed; sale proceeds and, when necessary, retained cash are adjusted to reach each target.
| Equity cash / capital | LP profit / loss | GP investment profit / loss | GP carry |
|---|---|---|---|
| 0.50x | -$4,500,000 | -$500,000 | $0 |
| 1.00x | $0 | $0 | $0 |
| 2.00x | $7,920,000 | $1,000,000 | $1,080,000 |
| 3.00x | $15,120,000 | $2,000,000 | $2,880,000 |
Upside compensation changes the GP’s return
The GP contributes $1,000,000 and receives $1,800,000 on that investment, plus $720,000 of carry. Fee revenue of $0 is separate and can exist even when investors lose money.
05 / Timing experiment
When does the money move?
Move part of the same total cash earlier. Recalculate each payment through the waterfall and compare it with receiving everything at exit.
Year-end payment, after the final capital call and before final exit. A call in the same year occurs immediately before the payment.
Simple preference accrues on unreturned capital. Compound preference also accrues on unpaid preference. Neither is a guaranteed cash yield.
One pool of cash, counted once
Move $4,500,000 earlier; leave $13,500,000 for year 5. Contributions, fees, and total available cash stay fixed. The investor split can change.
Cash is already net of operating costs, debt payments, and modeled fees. This experiment does not create cash or forecast a refinance. A real refinance also changes the loan and future payments.
Before revealing the result: who benefits?
Will earlier cash raise LP IRR? Will fewer dollars accrue to the preferred return? Does a full catch-up change the answer?
Use the ledger to separate timing gains from changes in who receives the profit.
Calls below. Payments above.
Grey bars are partner contributions. Payment bars separate LP proceeds (teal), GP co-investment (gold), and carry (purple). Year 0 is closing; later dates are year-end.
| Measure | Everything at exit | Your timing case |
|---|---|---|
| LP proceeds | $15,480,000 | $15,285,600 |
| LP profit / loss | $6,480,000 | $6,285,600 |
| LP IRR | 11.46% | 13.85% |
| LP multiple | 1.720x | 1.698x |
| GP carry | $720,000 | $914,400 |
| First carry payment | Year 5 | Year 5 |
Read the dollars and the clock together
With simple preference, returning capital sooner shrinks the balance earning future preference; a preference payment alone does not return principal. With annual compounding, interest also accrues on unpaid preference. For the same dated cash flows and hurdle, relabeling capital versus interest does not change IRR.
Earlier payments can reduce the preference hurdle and leave more cash subject to carry. A higher LP IRR does not necessarily mean more total LP dollars.
Annual payment ledger · scroll for all columns
| Year | Total called | LP capital back | LP preference | LP other profit | GP co-investment | GP carry | LP capital left | Unpaid LP preference |
|---|---|---|---|---|---|---|---|---|
| 0 | $10,000,000 | $0 | $0 | $0 | $0 | $0 | $9,000,000 | $0 |
| 1 | $0 | $0 | $0 | $0 | $0 | $0 | $9,000,000 | $720,000 |
| 2 | $0 | $4,050,000 | $0 | $0 | $450,000 | $0 | $4,950,000 | $1,440,000 |
| 3 | $0 | $0 | $0 | $0 | $0 | $0 | $4,950,000 | $1,836,000 |
| 4 | $0 | $0 | $0 | $0 | $0 | $0 | $4,950,000 | $2,232,000 |
| 5 | $0 | $4,950,000 | $2,628,000 | $3,657,600 | $1,350,000 | $914,400 | $0 | $0 |
Total payments: $18,000,000. Matches the original $18,000,000 cash pool.
This is a two-distribution, annual-date experiment. It does not model cash paid before later capital calls, multiple operating distributions, refinancing mechanics, daily XIRR, escrow, or clawbacks. Fees are excluded from GP investment return metrics.
Baseline · all payments at final exit
LP total proceeds$15.48M1.72x · 11.5% IRR
LP profit / loss$6.48MAfter modeled fees and carry
GP carry / promote$720,000Excludes co-investment proceeds
GP total distributions$2.52M2.52x · 20.3% IRR · excludes fees
Timing: steps 1–4 use one closing contribution and one final distribution. Step 5 compares an earlier payment plus the reduced final payment. IRRs use annual dates, not daily XIRR. Equity multiple = total distributions ÷ total contributions. GP return metrics include carry, exclude fees, and are N/A if the GP invests no capital. With no positive distributions, IRR is N/A even though the capital loss is 100%. Displayed dollars are rounded; calculations are not.
Know what the words mean
Promote, carry, and carried interest
Carry is short for carried interest. Promote is the common real estate term for the same broad performance-incentive concept. A percentage alone is incomplete: identify the profit pool, payment priority, hurdle, catch-up, and treatment of GP co-investment.
Promote / promoted interest
The term commonly used in real estate for the sponsor’s performance allocation. It often describes the same economic idea as carry. The words alone do not specify the hurdle, catch-up, or whether the quoted GP split includes co-investment.
GP, LP, and sponsor
GP means general partner; LP means limited partner. The sponsor organizes and manages the investment. These labels describe roles; an LLC may use manager and member terminology. The legal documents determine rights and liabilities.
Open the full waterfall glossary · Find a scenario or check model coverage
Understand what you calculated
The decisions behind the numbers
Raise enough for all uses
The investment price is only one use of cash. Include transaction costs, reserves, and fees. Subtract debt to find the equity requirement, then allocate that equity between the GP and LPs.
A commitment is a promise to fund
A contribution is money actually paid in. A fund can call committed capital over time. Returns should use the dates of funded contributions, not automatically treat the entire commitment as invested on day one.
Capital back is not profit
If you put in $100 and receive $130, your distribution is $130 but your profit is $30. An equity multiple includes the original $100. A preferred return sets a payment priority before the incentive allocation.
Name the split convention
With a 10% GP investment, 20% carry on the LP pool produces a 28% total GP share of a residual dollar: 10% + 20% × 90%. A 20% total GP residual split instead leaves 80% for LPs. Those are different agreements.
Risk, reward, and what the model leaves out
LP risk
Capital can be locked up and lost. An 8% preferred return is paid only if sufficient distributable cash exists. Unfunded commitments may still have to be paid when called.
GP risk and reward
The GP can lose its invested capital while earning no carry. Fees are business revenue, not take-home profit. Guarantees, operating costs, duties, and clawback obligations can add exposure beyond the amount invested.
Shared incentives
Co-investment puts GP capital at risk. Carry rewards upside but can encourage risk-taking. Compare downside protection, control rights, fee terms, and reporting as well as a headline split.
Steps 1–4 use one final distribution. Step 5 adds one early payment after all capital calls, then a reduced final payment. Both use annual dates and fixed partner ownership. Taxes, recycling, subscription lines, fee waivers and offsets, later calls after payouts, daily XIRR, and contractual clawbacks require a separate model. These examples are tested educational calculations, not a reconstruction of a named fund’s performance or an audit of an actual partnership agreement.
Waterfall questions students ask
Are promote, carry, and carried interest the same thing?
Carry abbreviates carried interest. Promote is commonly used in real estate for the same broad incentive-profit concept. The agreement still determines when it is earned, which profit pool is used, and whether the quoted GP percentage includes co-investment. Management fees and returns on GP capital are separate.
Why does a complete loss show N/A IRR?
IRR solves for a discount rate that makes cash-flow net present value zero. With contributions and no positive distributions, there is no valid solution. Losing the entire contribution is a 100% capital loss and a 0.00x multiple, but not a calculated −100% IRR. With no GP investment, GP IRR is also undefined.
Are all common waterfall provisions calculated here?
The lab calculates core whole-pool structures: pro rata, no hurdle, preference without catch-up, partial or full catch-up allocations, and two IRR tiers. It also compares two payment dates. The overview maps additional common terms to explanations, including deal-by-deal carry and clawbacks, and identifies provisions that need a separate model. It is not a universal LPA engine.
Does an 8% preferred return guarantee an 8% IRR?
No. It is a payment priority, and the cash may be insufficient. With one initial contribution, an 8% simple preference over five years adds 40% to capital; receiving 1.40x at year 5 is about a 6.96% annual IRR. An 8% compounded hurdle requires about 1.4693x over those same five years. Interim cash flows change the calculation.
When does the GP actually receive carried interest?
Only when a distribution reaches an incentive tier in the modeled agreement. Fees can be received earlier and are separate. In the timing step, the chart and annual ledger show the first year carry is paid. Real agreements may also defer cash in escrow or impose clawbacks and other conditions.
Does returning capital early always help the LP?
Earlier cash generally improves time value, but it can also reduce later preference accrual on unreturned capital and increase carry. Compare net LP dollars, IRR, and the payment priority together. Relabeling the same dated cash flows alone does not change IRR; changing the economic accrual rules can.
What is the difference between European and American waterfalls?
These labels commonly mean whole-fund and deal-by-deal carry, respectively; they are not geographic guarantees. Whole-fund terms look across fund contributions and results. Deal-by-deal terms can pay carry sooner, subject to the actual agreement’s loss, reserve, escrow, and clawback provisions. The live lab uses whole-pool economics, not deal-by-deal administration.
Is this an audited fund-administration or legal calculation?
No. The published examples are tested teaching models. They assume fixed GP ownership, pro-rata co-investment, the specified fee base, and annual dates. The timing comparison adds one early payment after all calls and one final payment. It does not handle later capital calls after payouts, taxes, recycling, investor-specific side letters, GP fee waivers, daily XIRR, subscription lines, or a contractual clawback. The signed agreement and actual dated cash flows control real distributions.
Bring these questions to class
- Who supplies the next dollar if costs rise?
- Does “20% promote” mean 20% total to the GP, or 20% of the LP pool?
- Does the GP still receive carry when LPs lose money?
References & further reading
ILPA workshop · worked whole-fund waterfall, slide 12
Independent arithmetic benchmark: $100M capital, $4M accrued preference, $112M to LPs, and $3M carry. The general-page adaptation simplifies the dates.
A.CRE · payment timing, preferred return, and capital
Distinguishes a cash yield from an IRR hurdle and explains why the agreement’s distribution provisions matter.
ILPA model LPA · whole-fund distributions and clawback
An example agreement, not a universal set of terms. See §§14.3 and 14.7; its bracketed catch-up allocation is 80%.
A.CRE · real estate catch-up and promote mechanics
Shows how sponsor fees, hurdles, catch-ups, and promote conventions can differ.
Carta · 2025 Fund Economics Report
Context for fee and carry terms observed on Carta’s platform; the presets here are illustrative, not a market quote.
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