Hong Life CalculatorsUnderstanding the carried interest calculator — concept and principle
This calculator splits a private equity or venture fund's proceeds between investors (limited partners, LPs) and the manager (general partner, GP) using a whole-fund distribution waterfall with a preferred return, GP catch-up and carried interest. It shows the GP's carry, what investors receive, the preferred return owed, the catch-up amount, the GP's share of profit and investors' net multiple. Use it to understand fund terms.
How it is calculated
Tiers, paid in order:
- Return of capital to LPs.
- Preferred return to LPs: capital × ((1 + hurdle)^years − 1).
- GP catch-up: the GP takes its catch-up share of the next proceeds until it has received the carry rate of all profit paid so far; this tier equals carry × preferred return ÷ (catch-up share − carry).
- Remaining proceeds split carry : (1 − carry) between GP and LPs.
With a 100% catch-up and enough profit, the GP ends with exactly the carry rate of total profit.
The principle
Carried interest aligns the manager with investors: the GP earns a share of profits, but only after investors get their money back plus a minimum return (the hurdle). The catch-up then lets the GP "catch up" so its share of total profit reaches the agreed carry rate, typically 20%. Without a catch-up, the GP shares only in profit above the hurdle, which favours investors. Real agreements time-weight capital calls and distributions, may run deal by deal, and include management fees and clawbacks.
Worked example
Default inputs: LP capital $100,000,000, proceeds $200,000,000, hurdle 8% a year for 5 years, carry 20%, catch-up 100%.
- Return of capital: $100,000,000 to LPs; $100,000,000 profit remains.
- Preferred return = 100,000,000 × (1.08⁵ − 1) ≈ $46,932,808 to LPs.
- Catch-up = 0.20 × 46,932,808 ÷ (1 − 0.20) ≈ $11,733,202 to the GP.
- Remaining ≈ $41,334,000 split 20/80: GP ≈ $8,266,800, LPs ≈ $33,067,200.
- GP carry = $20,000,000 (20% of profit); LPs receive $180,000,000, a 1.8× net multiple.
| Total proceeds to distribute | GP carried interest |
|---|---|
| 5e+07 | $0 |
| 1e+08 | $0 |
| 1.5e+08 | $3,067,192 |
| 2e+08 | $20,000,000 |
| 2.5e+08 | $30,000,000 |
| 3e+08 | $40,000,000 |
| 4e+08 | $60,000,000 |
How to read the result
If the GP's share of total profit equals the carry rate, the catch-up was fully reached. With lower profits, part or all of the catch-up may not be paid, and the GP's share falls below the carry rate. Investors' net multiple shows what they got back per unit invested after carry, before management fees.
Common mistakes
- Applying the hurdle as simple interest when the agreement compounds it, or the reverse.
- Forgetting the return of capital before computing profit.
- Treating a European (whole-fund) waterfall like an American (deal-by-deal) one.
Frequently asked questions
What is a typical carried interest rate?
20% of profits is common, often with an 8% preferred return.
What does a full catch-up mean?
After the hurdle, the GP receives 100% of the next proceeds until its share of profit equals the carry rate.
Is carried interest the same as a management fee?
No. The management fee is charged on capital each year; carry is a share of profits.
Sources: Z. M. Huang (EisnerAmper), "Using Waterfalls to Allocate an Investment's Distributable Proceeds: GP Catch-Ups with Examples" (22 Feb 2024)