How to model management fee and carried interest
TL;DR
Management fee is usually 2% a year on committed capital, stepping down after the investment period. Carried interest is usually 20% of profits above an 8% preferred return, often with a GP catch-up. Model both and you understand GP economics.
Management fee
A typical fund charges 2% a year on committed capital during the investment period (usually years 1 to 5), then steps down to a lower rate on invested capital thereafter.
Fees fund the GP's operating costs. They are paid whether the fund makes money or not.
Carried interest
The GP earns a share of profits (usually 20%), but only after LPs get back their capital plus a preferred return (usually 8%).
Some funds include a GP catch-up: after the hurdle, the GP takes 100% of profits until the total split reaches the target 80/20 ratio, then it goes back to 80/20 on the rest.
Waterfalls come in two flavours: European (fund level, LPs made whole before any carry) and American (deal by deal). European is more LP-friendly and is the norm in institutional funds.
How this shows up on the job
Every LP model and every GP economics analysis uses this structure. Understanding it means you can read a fund PPM and know exactly how the GP gets paid.
How Reuben AI helps
Reuben AI models fund waterfalls and returns to LP and GP for every fund on the platform with full transparency of the assumptions and hurdle mechanics.
Sources
Frequently asked questions
Why 8% preferred return?
It is an industry norm, not a rule. Some funds use 6% or 10%.
What is a catch-up?
A period after the hurdle where the GP takes 100% until the overall split matches the target 80/20.
European vs American waterfall, which is better?
For LPs, European. For GPs, American.
Do all funds charge 2 and 20?
No. Emerging managers sometimes charge less, mega funds sometimes charge more on carry.
How is carry taxed?
Historically as capital gains in most jurisdictions. Rules are changing in some countries.
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