# Carried Interest

**Carried interest** is the formal term for [carry](/waterfall-and-distributions/carry.md) — the GP's performance-based share of fund profits earned above the [preferred return](/waterfall-and-distributions/preferred-return.md) hurdle. The two terms are used interchangeably in fund documentation and LP reporting.

## Standard Structure

The typical carried interest structure:

* **20%** of profits above the hurdle (the GP's carry rate)
* **8% per annum** preferred return hurdle (the minimum LP return before carry activates)
* Applied after return of capital to LPs (Tier 1 of the [waterfall](/waterfall-and-distributions/waterfall.md))

Under this structure, for every dollar of profit above the preferred return, the GP receives 20 cents and the LP receives 80 cents.

## Carried Interest vs Management Fee

These are distinct compensation mechanisms:

|           | Carried Interest         | Management Fee                    |
| --------- | ------------------------ | --------------------------------- |
| Type      | Performance fee          | Flat annual fee                   |
| Trigger   | Fund profit above hurdle | Charged regardless of performance |
| Basis     | % of profits             | % of committed capital or NAV     |
| Recipient | GP entity                | GP entity                         |
| Timing    | On distributions         | Quarterly or semi-annually        |

The management fee covers GP operating costs; carried interest is the GP's upside when the fund performs well. Aligning the two is the essence of the GP-LP incentive structure.

## Tax Treatment

In most jurisdictions, carried interest is taxed at capital gains rates (rather than income tax rates) because it is structured as a partnership profits interest. This tax advantage is a significant benefit for GP team members who receive carry allocations. Tax treatment varies by jurisdiction and is subject to legislative change; consult the fund's legal counsel.

## Full Reference

For the complete treatment of how carry is earned, computed, and tracked — including the waterfall tiers, catch-up mechanics, clawback, and the European vs American model — see [Carried Interest (Carry)](/waterfall-and-distributions/carry.md).


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