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Carried interest

The share of a private fund's profits paid to the general partner, commonly 20%, after limited partners have received their capital back and any preferred return.

Distribution follows a waterfall. Typically limited partners first receive their contributed capital, then a preferred return of around 8%, then the general partner receives a catch-up, after which further profits split 80/20.

Carry is calculated either deal by deal, which pays the manager earlier, or on a whole-fund basis, which pays only after the entire fund is in profit. European-style whole-fund waterfalls are more investor-friendly; deal-by-deal arrangements rely on a clawback provision to recover overpayments at the end of the fund's life, and a clawback is only as good as the entity owing it.

Tax treatment of carry as a capital gain rather than as compensation remains politically contested in several jurisdictions. See hurdle-rate and performance-fee.

Related: hurdle-rate, performance-fee, private-equity, limited-partnership, two-and-twenty, high-water-mark

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

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