Carried interest (or “carry”) is the General Partner’s share of the profits generated by a venture-capital or private-equity fund — typically 20% of the fund’s gains above the hurdle rate, paid as performance compensation in addition to the annual management fee. Carry is the principal mechanism that aligns GP economic incentives with LP returns: GPs earn meaningful compensation only when LPs receive substantial returns above a contractually-defined minimum performance threshold.
The market-standard structure: 20% carry on profits above an 8% IRR hurdle, with a GP catch-up (typically 100%, meaning the GP receives 100% of profits between the hurdle and a defined point until the cumulative GP share reaches 20% of total profits, then 80/20 LP/GP split thereafter). Variations include: “super-carry” for top-decile funds (25–30% carry); tiered structures (20% above first hurdle, 25–30% above a second higher hurdle); European waterfall (whole-fund — carry only after LPs receive all contributed capital plus hurdle return); and American waterfall (deal-by-deal — carry distributable on individual exits, subject to clawback).
The economic distinction between American and European waterfalls is material. American (deal-by-deal) waterfalls accelerate GP carry distributions — GPs receive carry on early winning exits before knowing whether later losses will offset gains. Clawback provisions require GPs to return excess carry at fund-end if the fund-level economics didn’t justify the deal-level distributions. European (whole-fund) waterfalls defer all carry until LPs receive their full capital + hurdle return — eliminating clawback risk but delaying GP compensation by years.
Tax treatment of carry has been a politically-contested issue in the U.S. and EU. The 2017 Tax Cuts and Jobs Act extended the carry holding-period requirement from 1 to 3 years for long-term capital gains treatment; subsequent legislative efforts have sought to recharacterize all carry as ordinary income (top rate ~37%) rather than capital gains (top rate ~23.8% including NIIT). The economic impact on GPs is substantial — proposed legislation could reduce GP take-home carry by 30%+ on identical fund performance.
For Turkish GPs structuring international VC/PE funds or for Turkish LPs evaluating GP fund commitments, carry analysis requires understanding of: hurdle-rate calibration (8% is market but 6% appears in growth/secondary funds), waterfall structure (European is increasingly market-standard for newer funds), catch-up mechanics (100% catch-up is GP-favorable; 50% catch-up is LP-favorable), and clawback-protection mechanisms (escrow holds, security interests in GP assets). Vircon Legal advises GPs and LPs on carry economics — structure design, hurdle and waterfall calibration, clawback-protection negotiation, and the cross-border tax treatment of carry receipts under Turkish, U.S., and EU regimes.