How this instrument works
Carried interest is the share of a fund's profit that goes to the people who manage it — the general partner, or GP — once the fund has cleared a threshold owed to its investors first. That threshold is the hurdle: a return the limited partners (LPs) are entitled to before the GP participates in any upside at all. A private equity or venture fund with a $20 million profit and an $8 million hurdle has not earned the GP 20% of $20 million; it has earned the GP 20% of whatever sits above $8 million, because the hurdle is paid out first and only the remainder is split.
This is a different animal from a management fee, which is a flat percentage of committed capital charged every year regardless of performance. Carry is contingent — it pays only if the fund clears the hurdle, and pays nothing if it does not. Real fund waterfalls often add a GP catch-up tier between the hurdle and the carry split, letting the manager close the gap to its full percentage faster; this sheet models the simpler, single-tier version — profit above hurdle times carry rate — which is the arithmetic LPs check first when a distribution notice lands.
The reader here is usually one of three people: an LP reconciling a capital account statement against the fund's stated 20% carry, an associate at a GP modeling what a deal needs to return before carry kicks in, or someone trying to follow the long-running argument over whether carried interest should be taxed as a capital gain or as compensation for services. All three need the same starting number — profit above hurdle, not total profit — and that is the one mistake this instrument is built to prevent.
- Enter the fund's total profit in "Total fund profit, $" — the gain actually realized, not capital committed.
- Enter the return owed to investors before the manager participates in "Hurdle amount, $".
- Set the manager's share of profit above that hurdle in "Carried interest, %" — 20% is the market standard.
- Read "GP carried interest" — the dollar amount the general partner earns once the hurdle is cleared.
Worked example — a $20M fund against an $8M hurdle
A fund realizes $20,000,000 in total profit. Its terms set an $8,000,000 hurdle — the amount owed to limited partners before the manager earns anything — and a standard 20% carry rate on whatever profit clears that line. Profit above hurdle is $20,000,000 minus $8,000,000, or $12,000,000.
Carry is 20% of that $12,000,000, not 20% of the full $20,000,000 — the formula gives max(0, $20,000,000 − $8,000,000) × 20%, which is $2,400,000. The general partner's carried interest is $2,400,000, and the remaining $17,600,000 of profit, plus the $8,000,000 hurdle itself, flows to the limited partners. Confusing the two — applying the rate to total profit instead of profit above hurdle — overstates the GP's take by the full 20% of $8,000,000, or $1,600,000, in this example alone.
Questions
What exactly is the hurdle rate — is it the same as an interest rate?
No. It's usually a preferred return, often 8% a year on invested capital, expressed here as the total dollar amount owed to limited partners before the general partner earns any carry. Enter that cumulative dollar figure directly in "Hurdle amount, $" rather than recomputing an annual percentage yourself.
Why isn't carry just 20% of the whole profit?
Because the hurdle exists precisely to separate the return investors are owed for supplying capital from the profit that rewards the manager's skill. Carry only applies to the second bucket. Treating the whole profit as carry-eligible is the single most common misreading of a fund's distribution notice.
What's the GP catch-up clause this calculator doesn't model?
In many fund agreements, once the hurdle is cleared, the GP receives a disproportionate slice of the next dollars of profit — a catch-up — until its total take equals the full carry percentage of everything above zero, not just above the hurdle. This sheet models the simpler, non-catch-up split; a fund with a catch-up clause will show the GP a larger number than this formula returns.
Is carried interest taxed like a salary or like an investment gain?
In the U.S., carry held for more than three years is generally taxed at long-term capital gains rates rather than as ordinary income — a treatment set out under Internal Revenue Code Section 1061, and the subject of a long-running policy debate. This calculator computes the pre-tax dollar amount only; it does not model the tax owed on it.
Does the general partner keep the entire carry figure personally?
No. The dollar figure here is the carry earned by the GP entity as a whole; individual partners at the firm then split it according to their own internal agreement, which this sheet has no visibility into and does not attempt to model.
What if total fund profit is below the hurdle?
Carry is zero. The max(0, …) term in the formula exists for this case — a fund that never clears its hurdle returns every dollar of profit to limited partners, and the general partner earns no carried interest on that fund, regardless of the carry percentage set in the agreement.
References
- Investor.gov — Private Equity Funds (SEC Office of Investor Education)
- IRS — Section 1061 Reporting Guidance FAQs (carried interest holding period)
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.