# Carried Interest (Carry)

**Carried interest** (commonly called **carry**) is the GP's share of fund profits above the [preferred return](/waterfall-and-distributions/preferred-return.md) hurdle. It is the primary economic incentive aligning GP interests with LP returns — the GP earns carry only if the fund performs well enough to clear the hurdle.

## Standard Terms

* **Carry rate**: 20% is the industry standard. Some top-tier funds negotiate 25–30%, usually paired with a higher hurdle.
* **Hurdle**: carry does not accrue until LPs have received return of capital plus the preferred return.
* **Basis**: carry is computed on profits, not on total distributions. Return of capital is not profit.

## Carry in the Waterfall

Carry flows through Tier 3 (catch-up) and Tier 4 (residual split) of the [waterfall](/waterfall-and-distributions/waterfall.md):

```
Tier 3  GP catch-up:    GP receives until they hold 20% of total profits to date
Tier 4  Residual split: 80% LP / 20% GP on all further profit distributions
```

The [GP catch-up](/waterfall-and-distributions/catch-up.md) tier exists specifically to restore the GP to their carry percentage after the LP-heavy preferred return tier.

## Gross vs Net Carry

|                 | Description                                                                                                                                                    |
| --------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Gross carry** | GP's share before any management fee offsets or fund expenses                                                                                                  |
| **Net carry**   | After fee offsets — in many funds, transaction fees or monitoring fees reduce the management fee or are shared with LPs, which effectively increases net carry |

The LPA defines which fees offset the carry basis and by what percentage.

## Who Receives Carry

The GP entity (the general partner) is the carried interest holder in the LPA. Individual carry allocations to the GP's investment team are governed by a separate **carry plan** at the GP entity level, which Gildi does not manage. Each team member's share is an internal GP matter; Gildi tracks only the fund-level GP carry entitlement.

## Carry Timing by Waterfall Model

| Waterfall model                                                | When GP first earns carry                                    |
| -------------------------------------------------------------- | ------------------------------------------------------------ |
| [European](/waterfall-and-distributions/waterfall-european.md) | After *all* LP capital + preferred return returned fund-wide |
| [American](/waterfall-and-distributions/waterfall-american.md) | After each deal's capital + preferred return returned        |

The timing difference is significant: in a 10-year fund with good early exits, the GP under an American waterfall may receive carry in year 4; under a European waterfall, carry may not flow until year 7 or 8.

## Clawback

If the GP receives carry under an American waterfall and later deals underperform, a [clawback](/waterfall-and-distributions/clawback.md) may require the GP to return excess carry at wind-down. Under a European waterfall, clawback risk is minimal.

## Tax Treatment

In most jurisdictions, carry is taxed as capital gains rather than ordinary income, because it is structured as a profits interest in the partnership. This treatment is subject to ongoing legislative scrutiny in the EU, UK, and US. Tax considerations are outside the scope of Gildi's documentation; consult the fund's legal counsel for current treatment.

## How Gildi Tracks Carry

Gildi maintains a GP carry account that accumulates carry entitlements as distributions flow through Tier 3 and Tier 4. The carry account shows cumulative carry earned, carry paid, and carry accrued but not yet distributed (in funds with a carry escrow or holdback). The GP carry dashboard shows carry per fund and the waterfall position at any point in time.


---

# Agent Instructions: Querying This Documentation

If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question.

Perform an HTTP GET request on the current page URL with the `ask` query parameter:

```
GET https://docs.gildi.io/waterfall-and-distributions/carry.md?ask=<question>
```

The question should be specific, self-contained, and written in natural language.
The response will contain a direct answer to the question and relevant excerpts and sources from the documentation.

Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.