PEINVEST
Model carried interest waterfall distributions under a standard PE fund structure with preferred return hurdle, GP catch-up, and profit sharing.
This calculator models a standard American-style waterfall with compounded preferred return. European-style (whole-fund) waterfalls may differ. Actual fund terms vary by LPA.
Carried interest ("carry") is the share of profits that the GP (fund manager) receives as performance-based compensation. Typically 20% of profits above a preferred return hurdle (usually 8%). Carry is the primary economic incentive for PE fund managers and aligns GP/LP interests.
A distribution waterfall defines the priority order for distributing fund proceeds: (1) Return of capital to all partners, (2) Preferred return to LPs (usually 8% annualized), (3) GP catch-up (100% to GP until they receive their carry share of total profits), (4) Remaining profits split per the carry arrangement (typically 80/20 LP/GP).
American-style waterfalls (deal-by-deal) allow GPs to receive carry on individual profitable deals, even if the overall fund is not yet profitable. European-style (whole-fund) waterfalls require all invested capital plus preferred return to be returned across the entire fund before any carry is paid. European-style is more LP-friendly.
The preferred return (or "hurdle rate") is the minimum annualized return LPs must receive before the GP earns any carried interest. Typically 8% compounded annually. If a fund does not exceed the hurdle, the GP earns no carry regardless of the carry percentage in the LPA.
In the US, carried interest has historically been taxed at long-term capital gains rates (currently 20%) rather than ordinary income rates (up to 37%), provided the underlying investments are held for more than 3 years. This tax treatment has been debated in policy circles. Tax laws vary by jurisdiction and are subject to change.