Knowledge
How a private equity fund shares its profits with the GP — the distribution tiers, the hurdle, the catch-up, and the clawback that keeps them honest.
Last updated 4 July 2026
In brief: Carried interest is the general partner's share of a fund's profits — conventionally 20% — earned only once investors have had their capital returned and a minimum preferred return. The fund distribution waterfall is the set of ordered tiers that decide who gets each euro of proceeds: return of capital first, then the preferred return, then a GP catch-up, then an 80/20 split of everything above. It operates at the fund level and is distinct from the deal-level equity waterfall inside each portfolio company.
Carried interest — usually shortened to carry — is the performance-based share of a fund's profits paid to its general partner (GP), the firm that manages the fund on behalf of its limited partner (LP) investors. The market convention is 20%: once the fund has cleared certain thresholds, the GP receives 20% of every further euro of profit, with the remaining 80% going to the LPs. Carry sits alongside the annual management fee (commonly around 2% of committed capital) but is economically far more important — it is the mechanism that aligns the GP's incentives with the returns actually delivered to investors.
Crucially, carry is a share of profit, not of gross proceeds. The GP does not earn anything until investors have received back the capital they contributed and, in almost all modern funds, a minimum annualised return known as the preferred return or hurdle. Only profit above those thresholds is subject to the split. The exact ordering of who is paid what, and when, is governed by the fund's distribution waterfall, set out in the limited partnership agreement.
The waterfall is a sequence of tiers. Cash flowing back from realised investments fills each tier in strict priority order before any of it reaches the next. A conventional four-tier waterfall works as follows.
Return of capital. The first claim on distributions is the return to LPs of the capital they contributed — often including capital drawn to pay fees and expenses. Until every euro of paid-in capital has been returned, 100% of proceeds go to the LPs and the GP receives nothing.
Preferred return (the hurdle). Next, LPs receive a minimum compounded return on their capital before the GP participates. Eight per cent per annum is the long-standing market convention. The hurdle protects LPs against paying carry on returns they could plausibly have earned elsewhere; the GP only shares in genuine outperformance.
GP catch-up. Once the hurdle is met, a catch-up tier allows the GP to receive a high share — frequently 100% — of the next proceeds until the GP has caught up to its target percentage (typically 20%) of the total profit distributed so far, including the preferred return. A full catch-up means the preferred return effectively becomes a floor rather than a permanent giveaway: past the catch-up point, the GP has earned 20% of all profit, not 20% of profit above the hurdle.
The 80/20 split. Beyond the catch-up, all remaining profit is divided according to the carry percentage — 80% to LPs, 20% to the GP.
Consider a fund that called €100m from its LPs and returns €180m in total, an €80m profit. The hurdle is 8% and, for simplicity, we assume it compounds to a €20m preferred return over the life of the fund. Carry is 20% with a full GP catch-up.
| Tier | To LPs | To GP | Cumulative distributed |
|---|---|---|---|
| 1. Return of capital | €100.0m | — | €100.0m |
| 2. Preferred return (8%) | €20.0m | — | €120.0m |
| 3. GP catch-up (100%) | — | €5.0m | €125.0m |
| 4. 80/20 split of remainder | €44.0m | €11.0m | €180.0m |
| Total | €164.0m | €16.0m | €180.0m |
The GP's total carry of €16m is exactly 20% of the €80m profit — the arithmetic the catch-up is designed to achieve. The catch-up tier of €5m brings the GP up to 20% of the €25m of profit distributed by the end of tier 3 (the €20m preferred return plus the €5m catch-up); the final tier then keeps the 80/20 ratio intact on the last €55m. Without a catch-up, the GP would earn 20% only of profit above the hurdle, and its total carry would be lower.
The single most consequential design choice is when the waterfall is tested.
A European (whole-fund) waterfall applies the tiers across the fund as a whole. LPs must receive back all of their contributed capital across every investment, plus the preferred return, before the GP earns a cent of carry. This is the standard in European private equity and is strongly LP-friendly: it defers carry until the fund's overall performance is proven, which sharply reduces the risk of overpayment.
An American (deal-by-deal) waterfall applies the tiers to each realised investment individually. The GP can earn carry on an early winner even while capital remains at risk in other, as-yet-unrealised deals. This accelerates carry to the GP and is more common in US buyout and venture funds. Because carry can be paid before the fund's final outcome is known, deal-by-deal waterfalls rely heavily on the clawback to correct overpayment.
A clawback (or GP giveback) obliges the GP to return carry it has already received if, by the end of the fund's life, it turns out to have been paid more than its contractual share of total profit. This most often arises under a deal-by-deal waterfall: the GP takes carry on early exits, later investments underperform, and the aggregate result is that the LPs did not, in the end, receive their capital and preferred return. The clawback unwinds the excess.
Why clawback provisions demand precise records. Enforcing a clawback requires a defensible, transaction-level record of every contribution, every distribution, and the carry paid at each step — often over a decade. Reconstructing that history from spreadsheets years after the fact is error-prone. A transaction-based system where every capital flow is a dated, auditable entry makes the calculation reproducible on demand.
It is essential not to confuse the two waterfalls that a private equity structure contains. The carry waterfall described here operates at the fund level: it divides a fund's realised proceeds between its LPs and its GP. Sitting beneath it, inside each portfolio company, is the equity waterfall, which divides that single company's exit proceeds among the instruments in its cap table — debt, preference shares, shareholder loans, and ordinary shares held by the fund, co-investors, and management.
The relationship is sequential. A portfolio company exits; its equity waterfall determines how much cash reaches the fund; those proceeds, aggregated across all realised investments, then flow through the fund's carry waterfall to LPs and the GP. The performance metrics LPs watch — DPI, TVPI and RVPI and the fund's IRR and money multiple — are all measured on the net cash that survives both waterfalls, which is why the two must be modelled consistently.
Because both are ultimately driven by the same underlying instrument positions, CapTab derives them from a single transaction register — the dated contributions, subscriptions, accrued interest, and distributions — so that the deal-level and fund-level pictures always reconcile to the same source of truth.
Contributions, distributions, accrued interest and carry — tracked per investor and reconciled to one auditable source across your fund structure.