Also known as carry or a performance fee. In private equity, a share of a fund's profits that the general partner is entitled to receive from the fund. This method of compensation is designed to incentivize the general partner to generate profits for the fund. Typically, the general partner only receives carried interest when the fund achieves profits above a certain pre-agreed rate of return on contributed capital (known as hurdle or preferred return). The customary rate of return is 8% per annum.

Carried interest is typically expressed as a percentage of total fund profits, and the market standard for carried interest is generally 20% of the fund's profits exceeding the hurdle rate.

Essentially, the general partner is "carried" by the investors because they allocate a high percentage of their profits generated by their invested capital to the general partner.

For a discussion of carried interest and hurdle, see Practice Note, Structuring Waterfall Provisions.