Carried Interest Is the Manager's Share of Profit, Not a Fee
Unlike the management fee (a fixed annual charge for running the fund), carried interest — "carry" — is a share of the fund's actual investment profits paid to the manager/sponsor, and only earned if the fund performs above a defined threshold. It's the mechanism that aligns manager incentives with investor outcomes.
How Carry Is Typically Structured
A standard carry structure in Indian AIFs involves:
- A hurdle rate — the minimum return investors must receive before the manager earns any carry (commonly in a defined annual percentage range, fund-specific)
- A carry percentage — the manager's share of profits above the hurdle, once earned (a widely referenced industry benchmark is around 20%, though this varies by fund and asset class)
- A catch-up mechanism — allowing the manager to "catch up" to their full carry percentage on total profits, once the hurdle is cleared (see our detailed article on the distribution waterfall)
When Is Carry Actually Paid?
This depends entirely on the waterfall structure chosen in the PPM:
- Deal-by-deal (American) waterfall — carry can be paid as each individual investment is exited profitably, subject to hurdle and catch-up on that deal
- Whole-fund (European) waterfall — carry is only paid after investors have received back their full capital plus preferred return across the entire fund Deal-by-deal structures can create scenarios where a manager receives carry on an early profitable exit, but the fund overall underperforms later — which is why many such structures include a "clawback" provision requiring the manager to return excess carry if this happens.
How Carried Interest Is Taxed
Carried interest is generally treated as capital gains where structured as a genuine share of investment profits tied to fund performance, though the tax characterisation depends on the specific legal structuring of the carry arrangement and has been the subject of evolving judicial and regulatory positions. This is a critical area to get right at the structuring stage — retrofitting carry tax treatment after the fund is operational is far harder than designing it correctly upfront.
Why Investors Should Understand Carry Mechanics, Not Just the Headline Number
The headline carry percentage tells only part of the story — hurdle rate, catch-up percentage, and whether it's deal-by-deal or whole-fund materially change how much of total fund profit actually goes to the manager versus investors, even at the same headline carry rate.
Structuring Carry Correctly From Day One
We advise fund sponsors on carry structuring — balancing manager alignment, investor expectations, and tax efficiency — as part of PPM drafting and financial model design.
This article is for general informational purposes and does not constitute tax or legal advice on carry structuring.