Glossary
Carried Interest
The share of investment profits — typically 20% — that VC fund managers earn as compensation for generating returns.
By Amit Tyagi, Fitoor Capital · AletheiaAI Glossary
Definition
Carried interest (or "carry") is the share of profits that GP/fund managers earn when their investment returns exceed the agreed threshold. Typically, VCs earn 20% of profits above the hurdle rate — meaning after LPs have received back their capital plus a preferred return (usually 8% per year), the VCs take 20% of all additional profits.
Carry aligns GP incentives with LP interests — GPs only earn big if their investments perform well. A GP managing a ₹1,000 crore fund that returns 3x earns: ₹2,000 crore profit − ₹1,000 crore capital return = ₹1,000 crore × 20% = ₹200 crore in carry. This is the primary wealth-creation mechanism for VC fund managers.
India Context
Indian VC funds registered as SEBI AIFs are subject to specific carried interest regulations. Category II AIFs typically have 20% carry with 8% hurdle rate, distributed after returning LP capital. Indian GPs building carry portfolios through early-stage startups that IPO (Zomato, Nykaa, Delhivery) have generated significant wealth in the last 5 years — which has made the GP/emerging manager career path more attractive for ex-operators and investors.
Example
A VC fund invests ₹500 crore, achieves 2.5x return = ₹1,250 crore total value. LPs first get their ₹500 crore capital back, plus 8% hurdle = ₹40 crore. Remaining profit = ₹710 crore. GPs earn 20% carry = ₹142 crore. LPs receive ₹568 crore in additional profit. Total LP return: ₹500 + ₹40 + ₹568 = ₹1,108 crore. GPs earned ₹142 crore in carry plus management fees over the fund life.
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