Knowledge Base
CarryBeast Glossary
Plain-English definitions for carry mechanics, waterfall modeling, GP compensation, vesting and clawback, and fee structures — the terms that decide who is paid what, and when.
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C
Capital interest vs profits interest
A capital interest confers a share of a partnership's existing capital; a profits interest confers only a share of future profits.
Carried interest
Carried interest is the general partner's share of a fund's investment profits, paid only after limited partners have received their capital and any preferred return.
Carry basis
Carry basis is the measure of capital or profit the carried interest percentage is applied to.
Carry escrow / holdback
Carry escrow, or holdback, retains a portion of each carry distribution to secure the clawback obligation.
Carry on net vs gross profits
Carry on net profits is calculated after fees and expenses; carry on gross profits is calculated before them.
Carry on realized vs unrealized gains
Carry on realized gains is computed only on investments actually exited; carry on unrealized gains includes the manager's own valuations of what it still holds.
Carry pool
The carry pool is the portion of a fund's carried interest set aside for allocation among the management company's team.
Carry vesting
Carry vesting determines how much of an individual's allocated carried interest they keep if they leave the firm.
Clawback measurement dates
Clawback measurement dates are the points at which the general partner's cumulative entitlement is tested against what it has actually received.
Clawback security
Clawback security is the mechanism ensuring money is available to satisfy the obligation when it is called.
Committed-capital fee basis
A committed-capital fee basis charges the management fee on the total capital limited partners have committed, whether or not it has been drawn.
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Deal-by-deal / American waterfall
A deal-by-deal, or American, waterfall applies the distribution tiers to each realized investment separately rather than across the fund as a whole.
Deal-by-deal vesting
Deal-by-deal vesting earns carried interest as individual investments are made or realized rather than on a calendar schedule.
Distribution waterfall
A distribution waterfall is the ordered sequence of tiers determining how a fund's proceeds are divided between limited partners and the general partner.
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GP catch-up
The GP catch-up is the mechanism by which the general partner receives a disproportionate share of distributions until the agreed profit split is restored.
GP catch-up tier
The catch-up tier pays the general partner a disproportionate share of distributions until it has received its agreed percentage of cumulative profit.
GP clawback
A GP clawback is the general partner's obligation to return carried interest it has already received, when the fund's final results show it was overpaid.
GP commitment
The GP commitment is the manager's own capital invested in the fund alongside limited partners.
Giveback limitations period
The giveback limitations period is the deadline after which limited partners can no longer be required to return distributions.
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I
IRC §1061
Section 1061 requires a three-year holding period, rather than one year, for carried interest gains to receive long-term capital gain treatment.
IRC §1202 QSBS exclusion
Section 1202 allows a non-corporate taxpayer to exclude gain on qualified small business stock that meets its issuance, issuer and holding-period conditions.
Incentive fee
An incentive fee is a performance-based charge calculated as a share of investment gains, most commonly in hedge funds.
Interim clawback / true-up
An interim clawback tests and reconciles the general partner's carry entitlement during the fund's life rather than only at wind-up.
Invested / unrealized-cost fee basis
An invested-capital fee basis charges the management fee on capital actually deployed and still held, rather than on total commitments.
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Management fee
The management fee is the periodic charge paid by a fund to its manager for operating the fund, payable whether or not the fund is profitable.
Management fee offset
A management fee offset credits fees the manager receives from portfolio companies against the management fee the fund pays.
Management fee step-down
A management fee step-down reduces the fee rate, the fee basis, or both, once the fund's investment period ends.
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P
Preferred return
The preferred return is the return limited partners must receive on contributed capital before the general partner participates in profits.
Preferred return tier
The preferred return tier pays limited partners an agreed return on their contributed capital before the general partner participates in profits.
Profits interest units (PIUs)
Profits interest units are partnership interests granted to individuals that entitle the holder to future appreciation only, not to existing capital.
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R
Residual / final split tier
The residual tier divides all remaining profit in the agreed final ratio, commonly 80% to limited partners and 20% to the general partner.
Return of capital tier
The return of capital tier repays limited partners the capital they have contributed, before any profit is shared.
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Vacated SEC Private Fund Adviser Rules
The 2023 SEC Private Fund Adviser Rules were vacated in their entirety by the Fifth Circuit on 5 June 2024 and impose no current obligations.
Vesting acceleration
Vesting acceleration causes unvested carried interest to vest immediately on a defined event, such as a change of control or death.
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Who pays the management fee
Limited partners pay the management fee; it is charged to the fund rather than to portfolio companies.
Whole-fund / European waterfall
A whole-fund, or European, waterfall pays carried interest only after limited partners have received all contributed capital and their preferred return across the entire fund.