Carried interest, or "carry" for short, is a form of compensation paid to investment executives like private equity, hedge fund, and venture capital managers. It is a share of profits earned by general partners of private equity, venture capital, and hedge funds. Carried interest is due to general partners based on their role rather than an initial investment in the fund. It is a performance fee that aligns the general partners compensation with the funds returns. Carried interest is often only paid if the fund achieves a minimum return known as the hurdle rate. It typically qualifies for treatment as a long-term capital gain taxed at a lower rate than ordinary income.

Carried interest is a percentage of a private funds investment profits that a fund manager receives as compensation. It is used primarily by private equity funds, including venture capital. Much like equity in a startup or other companies, venture firms use carried interest to compensate and incentivize their fund managers. Although fund managers often receive other kinds of compensation, such as a salary paid by the firm, a large percentage of their income typically comes from their share of carry in the funds they manage.

Carry is distributed in either a European-style or American-style waterfall scenario. In a European-style waterfall, the carried interest is applied to the whole investment fund. In an American-style waterfall, the carried interest is applied to each individual investment deal. For example, if a VC firm made 10 investments of $5 million each, and five saw a gain of $2 million each and the other five incurred losses of $1 million each, the GP would collect carry on each of the successful investments gains and would not have to consider deal-specific losses, unless a clawback is triggered. Sometimes, at larger VC firms, carry can be subject to vesting.

In summary, carry is a percentage of a private funds investment profits that a fund manager receives as compensation, used primarily by private equity funds, including venture capital. It is a performance fee that aligns the general partners compensation with the funds returns and is often only paid if the fund achieves a minimum return known as the hurdle rate. Carry is distributed in either a European-style or American-style waterfall scenario, and sometimes it can be subject to vesting.