The carried interest calculator above runs a four-tier distribution waterfall on figures you supply. Capital comes back first, then a preferred return accrued at the rate and on the basis you choose, then a catch-up that brings the general partner up to its agreed share of profits, then a residual split at the carry percentage. It computes a European, whole-fund waterfall, and that choice matters more than any other single decision on the page.
Arb Digital builds free tools that name their conventions rather than presenting one arrangement as the arrangement. Nothing here is a market rate, a recommendation or a benchmark: every percentage, every year count and every dollar figure is an input, because carried interest is a contractual mechanic and the contract varies. The limited partnership agreement governs, and where this page and an LPA disagree, the LPA is right and the page is wrong.
What This Carried Interest Calculator Does
Carried interest is the general partner's share of a fund's profits, distinct from the management fee, which is charged on capital rather than on gains. The mechanism that decides how much of it is actually paid, and when, is the distribution waterfall: an ordered sequence of tiers, each of which must be filled before the next receives anything. The order is what does the work.
In the whole-fund version modelled here, the first tier returns contributed capital to the partners who put it in. The second pays a preferred return, often called the hurdle, on that capital. The third is the catch-up, in which the general partner receives a large share of the next distributions until it has caught up to its agreed percentage of the profits paid so far. The fourth splits everything remaining at the carry percentage.
The calculator reports each tier separately rather than only the total, because the tiers behave differently. The preferred return is arithmetic on capital and time. The catch-up is a step whose size depends on the preferred return that preceded it. The residual split is a simple percentage. Seeing them apart is the only way to understand why a small change in the hurdle can move the general partner's cheque by a great deal more than the hurdle itself.
How to Use It
- Enter contributed capital and total proceeds. Proceeds should be the amount actually available for distribution after fees and expenses, since the waterfall divides only what reaches it.
- Set the preferred return and the years it accrued over. A single average holding period is a simplification; real funds accrue the preference on each drawdown from the date it was drawn.
- Choose compounded or simple. Over a ten-year fund the difference between the two is substantial, and the agreement decides which applies.
- Set the carry and catch-up percentages. A 100 per cent catch-up gives the general partner exactly the carry percentage of total profits. A lower catch-up rate gives it less.
- Read the tiers, not just the total. The grid shows where each dollar went, which is what makes the mechanism legible.
The Formula: How the Waterfall Is Calculated
Write C for contributed capital, D for total proceeds, h for the preferred rate, n for years, c for the carry fraction and g for the catch-up rate. The preferred return amount is P = C × ((1 + h)n − 1) when compounded, or P = C × h × n when simple. Tier one pays min(D, C) to the partners as return of capital. Tier two pays min(remaining, P) as the preference. Tier three pays the general partner until it holds c ÷ (1 − c) × P, drawing distributions at rate g so that the LPs receive (1 − g) of that tier. Tier four splits what is left c to the GP and (1 − c) to the LPs.
Work the default figures. Capital is 100,000,000 and proceeds are 250,000,000, so profit is 150,000,000. At 8 per cent compounded over five years the preference factor is 1.085 − 1 = 0.46932808, so P = 46,932,808. Tier one returns 100,000,000 and leaves 150,000,000. Tier two pays the 46,932,808 preference and leaves 103,067,192.
The catch-up target is 0.20 ÷ 0.80 × 46,932,808 = 11,733,202, and at a 100 per cent catch-up rate the general partner takes exactly that much, leaving 91,333,990. The residual split gives the general partner 20 per cent of that, or 18,266,798. Total carry is 11,733,202 + 18,266,798 = 30,000,000, which is precisely 20 per cent of the 150,000,000 profit — the arithmetic identity a full catch-up is designed to produce. Limited partners receive 220,000,000, a 2.20 times multiple on capital.
European Whole-Fund Versus American Deal-by-Deal
This is the distinction that changes the number most, and it is why the page names its convention in the heading. A European or whole-fund waterfall tests the hurdle across the entire fund: no carry is paid until every limited partner has had all contributed capital back plus the preferred return on all of it. An American or deal-by-deal waterfall tests each realised investment separately, so carry can be paid on an early winner while later investments are still unrealised or heading for a loss.
The two can produce very different outcomes from identical underlying performance. Deal-by-deal pays the general partner sooner, which is worth real money in present-value terms, and it can pay carry that later turns out not to have been earned once the losers are realised. Whole-fund defers the general partner's economics to the end and largely removes that risk. The Institutional Limited Partners Association glossary sets out the underlying terms — carried interest, hurdle rate and catch-up — in their standard forms, and the ILPA's Private Equity 101 material covers the surrounding GP and LP relationship.
Deal-by-deal structures normally carry a clawback: an obligation on the general partner to return carry that turns out to have been overpaid once the fund is wound up. Clawbacks are contractual, sometimes capped, sometimes net of tax the general partner has already paid, and sometimes secured and sometimes not. This page does not model one, because a clawback is only meaningful against a specific agreement.
Why the Catch-Up Rate Matters More Than It Looks
The catch-up looks like a technicality and is not. With a full 100 per cent catch-up, the general partner ends up with exactly the carry percentage of total profits, and the preferred return functions purely as a timing device rather than as a genuine reduction in the general partner's share. With no catch-up at all, the preferred return is a real hard hurdle: profits up to the preference go entirely to the limited partners and the general partner takes its percentage only of the excess.
On the default figures, removing the catch-up entirely drops the general partner from 30,000,000 to 20 per cent of 103,067,192, which is 20,613,438 — roughly a third less, from a change that appears in one line of a document. Partial catch-ups at 50 or 80 per cent land in between, and they also change how much of the catch-up tier the limited partners receive along the way.
The interaction with the hurdle runs the other way from intuition. Under a full catch-up, raising the hurdle does not reduce the general partner's total carry at all when the fund performs well; it only delays it and enlarges the catch-up step. Under no catch-up, raising the hurdle reduces the carry directly. So the question "is an 8 per cent hurdle demanding?" has no answer until the catch-up rate is known.
What This Model Leaves Out
Real waterfalls are more detailed than four tiers. Capital is drawn over years rather than on day one, so the preference accrues on each drawdown from its own date, and a single average year count is an approximation. Management fees and fund expenses reduce the proceeds that reach the waterfall and are usually themselves recoverable within the return-of-capital tier, which changes the base the preference is calculated on.
Recycling provisions let a fund reinvest early proceeds rather than distribute them, which alters both the capital base and the timing. Some agreements calculate the preferred return on committed rather than contributed capital. Some apply the hurdle as an internal rate of return test rather than as an accrued amount, which behaves differently when cash flows are uneven — our IRR calculator covers that measure directly.
None of this makes the four-tier model useless; it makes it a teaching model. It shows how the pieces fit and how sensitive the result is to each one. For the actual entitlement under an actual fund, the partnership agreement, the fund administrator's calculations and the auditors are the authority, and no page on the open internet can substitute for reading the document.
Reading the Result Against Other Return Measures
The carry figure alone says little about performance. A fund returning 2.20 times capital over five years has produced a compound annual growth rate a good deal lower than the multiple suggests, and our CAGR calculator and annualized return calculator convert between the two. Because private fund cash flows are irregular, the industry usually quotes both a multiple and an internal rate of return, since neither is sufficient alone.
The multiple ignores time entirely, so a 2.2 times return in three years and in twelve years look identical by that measure. The internal rate of return accounts for timing but is sensitive to early distributions in ways that can flatter a fund. Discounting the distributions properly is a third view, and our NPV calculator and present value calculator handle that arithmetic when you have a discount rate in mind.
Arb Digital builds free tools like this one because useful pages earn attention. If you want tools, calculators or content built for your own audience, we can help.
Browse All Free Tools Talk to Arb DigitalCommon Mistakes to Avoid
- Assuming the hurdle reduces the carry — under a full catch-up it changes the timing and the tier sizes, not the general partner's final share.
- Comparing funds on carry percentage alone — the waterfall type, the catch-up rate and the preference basis all move the outcome more than the headline percentage.
- Treating a deal-by-deal figure as final — carry paid early may be subject to a clawback that this model does not include.
- Using committed capital when the agreement says contributed — the two differ by uncalled commitments and change the preference amount directly.
- Forgetting fees — management fees and expenses reduce the proceeds reaching the waterfall before any of this arithmetic starts.
Related Free Tools From Arb Digital
Fund arithmetic usually needs several views of the same cash flows. The IRR calculator handles the internal rate of return that private funds report alongside a multiple, the NPV calculator discounts an uneven distribution schedule, and the compound interest calculator shows how a preferred return accrues over a fund's life.
For the return side, the CAGR calculator and the annualized return calculator convert a multiple into a per-year figure, and the investment ROI calculator gives the simple gain on capital when time is not part of the question.
Frequently Asked Questions
It is the general partner's share of a fund's investment profits, typically expressed as a percentage of gains above a defined threshold. It is separate from the management fee, which is charged on capital rather than on performance, and it is paid through a distribution waterfall that sets the order in which money reaches each party.
A European, whole-fund waterfall. Capital and the preferred return are satisfied across the entire fund before any carry is paid. An American deal-by-deal waterfall tests each realised investment separately and can pay the general partner substantially more and considerably earlier from identical underlying performance.
After limited partners have received their preferred return, the catch-up tier directs distributions to the general partner until it holds its agreed percentage of the profits distributed so far. A full 100 per cent catch-up leaves the general partner with exactly the carry percentage of total profit; a lower rate leaves it with less.
No. It is an ordering rule inside the waterfall, not a promise. If the fund does not generate enough proceeds, limited partners simply do not receive the preference, and there is nobody obliged to make up the shortfall. Losses fall on the capital in the ordinary way.
Whichever the limited partnership agreement specifies. Compounding is the more common convention and produces a larger preference over a long fund life, but simple accrual is used too. The difference grows with the fund's duration, so it is worth checking rather than assuming.
An obligation on the general partner to hand back carried interest that later proves to have been overpaid, typically because early winners were realised before later losses. It is mostly a feature of deal-by-deal structures. Terms vary widely, including whether it is capped or calculated net of tax, and this calculator does not model one.
No. It computes a contractual mechanic from figures you enter and makes no assessment of any fund, manager, structure or investment. Fund terms are negotiated, they vary by strategy and vintage, and evaluating them is work for your own advisers with the actual documents in front of them.
This tool is provided for educational and estimating use only. It models one common waterfall structure from inputs you supply and is not investment, tax or legal advice, and it is not a recommendation of any fund, manager or strategy. The limited partnership agreement governs the actual entitlement, and fund terms should be reviewed with a qualified adviser.
