Enter the total profit available for carry and the return threshold (a profit hurdle, in $) into the calculator to determine the private equity carry under a simplified “carry on profits above a hurdle” assumption; this calculator can also be used to evaluate the carry amount given the other variables are known.
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Private Equity Carry (Simplified) Formula
The following simplified formula is used by this calculator to estimate carry on profits above a dollar hurdle (return threshold):
Carry = max(Profit - ReturnThreshold, 0) * (CarryPercentage/100)
Variables:
- Carry is the carried interest amount (in $) under this simplified model
- Profit is the total profit available for carry (in $)
- ReturnThreshold is the hurdle/threshold amount (in $) that must be exceeded before carry applies
- CarryPercentage is the carry rate (in %), applied to profits above the threshold
To calculate this simplified private equity carry, subtract the return threshold from the total profit to get the profit above the threshold (use $0 if the result is negative). Multiply that amount by the carry percentage (converted to a decimal) to determine carry.
What is a Private Equity Carry?
A Private Equity Carry, also known as carried interest, is the share of a fund’s profits allocated to the general partner (investment manager) as performance compensation, as defined in the partnership agreement. In many private equity structures, carry is generally paid only after limited partners receive a return of contributed capital and often a preferred return (a “hurdle”), and it may be subject to additional waterfall provisions (such as a catch-up) and potential clawback. A common carry rate is 20% of profits that are subject to the waterfall above the applicable hurdle, but the percentage and terms can vary by fund.
How to Calculate Private Equity Carry?
The following steps outline how to calculate the Private Equity Carry using the simplified approach on this page:
- First, determine the total profit available for carry ($).
- Next, determine the return threshold / hurdle amount ($).
- Next, determine the carried interest (carry) rate (%).
- Next, calculate the profit above the threshold: Profit Above Threshold = max(Profit − Return Threshold, 0).
- Next, convert the carry rate from a percent to a decimal by dividing by 100.
- Next, calculate the carry amount: Carry = (Profit Above Threshold) × (Carry Rate as a decimal).
- If profit does not exceed the threshold, the carry is $0 under this simplified model.
- Finally, report the carry amount ($).
Example Problem:
Use the following variables as an example problem to test your knowledge.
Profit ($) = 500,000
Return Threshold ($) = 200,000
Carry Percentage (%) = 20
Carry ($) = max(500,000 − 200,000, 0) × (20/100) = 60,000
