Carried Interest
The share of fund profits paid to the general partner, typically 20% above a hurdle rate.
Exam questions love a distribution-waterfall calculation: given committed capital, profits and a hurdle, solve for the GP’s carry. First check whether the waterfall is deal-by-deal (American) — carry paid per profitable deal, more GP-friendly — or whole-fund (European), where LPs recover all capital plus the hurdle before any carry is paid, so early-deal gains never trigger it. Level I fund-level examples are typically the whole-fund version, so work the cascade in that order. Watch the hurdle type: a hard hurdle charges carry only on profits above the threshold, while a soft hurdle (or any full catch-up) lets carry apply to the entire gain — candidates routinely skip the catch-up and undercount the GP.
Don’t confuse the hurdle (a return threshold) with the high-water mark (a hedge-fund device blocking repeat carry on merely recovered losses); a fund can use either, both or neither. Carried interest is the GP’s upside; management fees are paid regardless. Memory hook: “return, rate, catch-up, split.”
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