Carried Interest (Carry)
The GP's share of fund profits, typically 20%, which is their primary compensation incentive.
Definition
Carried interest is the share of a fund's profits that the general partner receives as performance compensation, typically 20% of profits above the invested capital (and sometimes above a preferred return hurdle). Carry is the primary financial incentive for GPs and is taxed at long-term capital gains rates (currently 20%) rather than ordinary income rates, which is a significant tax advantage and a topic of ongoing policy debate.
Why it matters
Carried interest is why VCs push for large exits. A GP with 20% carry on a $300M fund that returns $900M earns $120M in carry (20% of $600M profit). This incentive drives them to push portfolio companies toward big outcomes rather than modest ones.
Example
A $200M fund returns $500M to LPs. Profit is $300M. The GP receives 20% carry = $60M, split among the partners. If the fund only returns $200M (1x), there is zero carry, and the GP only earned management fees.