# Carried Interest

A 10-year European-waterfall carried-interest workbook: fund-term inputs (size, GP commit %, hurdle, carry %, mgmt fee); an annual capital-call and gross-distribution schedule; per-year and cumulative capital called (total / LP / GP), distribution, and mgmt fee; a four-tier cumulative waterfall (return of capital pro-rata, LP preferred return on outstanding LP capital, GP catch-up at 100%, 80/20 split of remainder); per-year LP and GP contribution, distribution, profit, MoIC, DPI plus GP carry $; and a dashboard with traffic-light LP MoIC status, pref-return-achieved flag, and a reconciliation check.

- Canonical: https://finamodel.com/templates/carried-interest
- Excel download: https://finamodel.com/templates/carried-interest.xlsx
- Category: Private Equity
- Model type: Fund model
- Difficulty: Intermediate
- Audiences: Investors & analysts, Bankers & advisors, PE & VC fund managers, LP investment teams, Fund administrators, Finance students
- Tags: carry, waterfall, private equity, venture capital, gp lp

## Overview

A carried-interest model translates a fund-level cash-flow schedule (annual capital calls and gross distributions over a 10-year life) and a small set of fund terms (size, GP commit %, hurdle, carry %, mgmt fee) into the four-tier European waterfall - return of capital, LP preferred return, GP catch-up, and an 80/20 split of remainder - and produces year-by-year LP MoIC / DPI and GP carry dollars. The workbook is built around the constraint every closed-end private fund shares: capital is called over the investment period, distributed during the harvest period, and split between LPs and GPs by a waterfall that gives the GP its share of upside only after LPs have recovered capital and earned a hurdle. Six sheets - Cover, Assumptions, Fund_Flows, Waterfall, LP_GP_Returns, Dashboard - tie everything to a single Assumptions tab where every input is a named range or a single per-year schedule cell.

The Fund_Flows sheet computes per-year and cumulative capital called (split between LP and GP by GP_Commit_Pct), gross distribution (cap-call and distribution percentages applied to fund size), and management fee (constant percent of fund size). The Waterfall sheet then runs the four-tier waterfall on a cumulative basis: Tier 1 returns capital pro-rata between LP and GP, capped by the total cumulative capital called; Tier 2 pays an LP preferred return computed by accruing the hurdle rate on outstanding LP capital after Tier 1 reductions, with a mid-year convention on the year's new contributions; Tier 3 catches the GP up to its carry share of post-capital profit using T3 = T2 × Carry / (1 - Carry); Tier 4 splits the remainder 80/20 between LP and GP. Cumulative LP and GP distributions are the sum of the respective tier payments, and the GP carry dollar is Tier 3 plus Tier 4 GP share. Annual flows fall out as cumulative deltas year over year.

The LP_GP_Returns sheet rolls each side onto its own block: per-year cumulative contribution, distribution, profit (distribution minus contribution), MoIC (distribution / contribution), DPI (same as MoIC for closed funds with no remaining NAV), and for the GP the carry dollar and the carry share of total profit. The Dashboard collapses fund-life-end values onto a one-page report: fund terms (size, GP commit %, hurdle, carry %, life), LP economics (committed, distributed, profit, MoIC, DPI, pref-return-achieved Yes / No), GP economics (committed, distributed, carry $, MoIC including carry, carry share of total profit), and a status block with an LP MoIC traffic-light flag (green / amber / off) against user-set thresholds and a reconciliation check that confirms LP + GP distribution equals fund distribution within tolerance. PE and VC fund managers, LP investment teams, fund administrators, and finance students use this template for term-sheet sensitivity (flex hurdle and carry % and read the LP / GP impact), back-of-envelope LP underwriting (drop in a fund's actual call and distribution schedule), and as an educational walkthrough of the four-tier European waterfall with every tier on its own row.

## What's included

- Fund-term inputs: fund size, GP commitment %, hurdle rate, carry %, mgmt fee, fund life
- 10-year capital-call and gross-distribution schedules expressed as % of fund size
- Fund_Flows sheet: per-year and cumulative capital called (total / LP / GP), gross distribution, mgmt fee
- Tier 1 returns capital pro-rata between LP and GP, capped at cumulative capital called
- Tier 2 pays LP preferred return accrued on outstanding LP capital with a mid-year convention on new contributions
- Tier 3 catches the GP up to its carry share of post-capital profit (100% catch-up)
- Tier 4 splits the remainder 80/20 between LP and GP
- LP_GP_Returns sheet: per-year contribution, distribution, profit, MoIC, DPI for both LP and GP plus GP carry $
- Dashboard with LP MoIC and DPI, GP carry $, pref-return-achieved flag, MoIC traffic-light status, reconciliation check
- 10-year capital-call and gross-distribution schedules as % of fund size
- Waterfall sheet: four-tier European waterfall on a cumulative basis with an annual flow strip
- Tier 1 return of capital pro-rata between LP and GP
- Tier 2 LP preferred return accrued on outstanding LP capital with a mid-year convention
- Tier 3 GP catch-up at 100% bringing GP to the carry share of T2+T3
- Tier 4 80/20 split of remaining distribution between LP and GP
- LP_GP_Returns sheet: per-year contribution, distribution, profit, MoIC, DPI for LP and GP, plus GP carry $
- Dashboard with headline LP MoIC / DPI, GP carry $, pref-return-achieved flag, MoIC traffic-light status, reconciliation check

## Carried Interest Model: How the GP–LP Waterfall Works

This carried interest model explains the GP–LP economics of a closed-end private fund. It links fund terms, capital-call and distribution schedules, management fees and a four-tier waterfall to LP net returns and GP carry.

The public file is a values-only preview of the underlying workbook.

### What Drives the Fund's Cash Flows

The fund is defined by size, GP commitment percentage, vintage year and a term split into investment and harvest periods. Three scenario rows supply annual capital-call, distribution and NAV percentages; the active row is chosen by a scenario switch.

- Capital called in each year equals the active call percentage times fund size, and the LP and GP portions split by the GP commitment. Gross distributions follow the same pattern on the distribution percentage row.

- Management fees are charged on an annual base, stepping down from an investment-period rate to a lower post-investment rate, with a fee offset reducing the gross fee. Net distribution, after fees and fund expenses, is what the waterfall receives.

### The Four-Tier Waterfall and Carry Calculation

The European whole-fund waterfall runs once across the fund's life. Tier 1 returns all paid-in capital to LPs and GPs pro-rata to commitments.

- Tier 2 then pays LPs a preferred return on outstanding LP capital, compounding by default at the hurdle rate. Tier 3 is the GP catch-up, where the GP takes a parameterised share of the next proceeds until cumulative GP economics reach the carry percentage of profit.

- Tier 4 splits the remainder at the carry rate, with an optional second-hurdle and higher carry rate. Because each tier is capped, cumulative carry cannot exceed entitlement, so clawback under this mode is structurally zero.

An alternative deal-by-deal mode runs the same tiers over a five-vintage grid with a fund-level clawback test, measuring carry paid against carry entitled.

### Returns, GP Economics and Diagnostics

Returns are tracked per year for both LPs and GPs on contributions, distributions, profit, MoIC, DPI, RVPI and TVPI, with XIRR on dated cash-flow streams.

- A GP economics view combines net management fees, carry, the GP commitment distribution and expenses to produce management-company profit and GP IRR.

- A dashboard summarises headline metrics and shows a traffic-light status against return thresholds, plus a reconciliation check.

- A checks sheet tests the model across reconciliation, monotonicity, range validity and mode toggles, all reported as pass or fail with conditional formatting.

### Practical Use and Documented Limits

This model is a fund-level GP-LP economics tool for comparing how terms, fee schedules and waterfall structures shape LP net returns and GP earnings. It suits evaluating carry timing, hurdle and catch-up effects, and how fees and expenses flow through to net distributions.

- Its documented limits matter: the American mode is a simplified five-deal, equal-weight grid rather than a deal underwriting model; NAV is parameterised as a multiple of paid-in capital decaying to zero by year ten; tax rates are captured but do not flow into net cash flows; and recycling and bridge-interest mechanics are captured as inputs but not modelled automatically.

- Multi-currency treatment is also out of scope.

### Model Structure and Inputs

Inputs are grouped into fund terms, fee terms, waterfall terms and fund mechanics, with scenario matrices and status thresholds.

- Fund flows drive the waterfall and the return sheets through documented dependencies.

- Two circularity risks are resolved by referencing prior-year values: the fee base after the step-down year and the second-hurdle test.

- The values-only preview shows the resulting outputs without live formulas.

## Built for the GP-LP economics conversation

When the question is "given this fund's call and distribution schedule, what does the LP get and what does the GP earn in carry?", a four-tier European waterfall with explicit per-year cumulative payments is the cleanest answer. This template gives PE / VC fund managers and LP underwriters an audit-ready waterfall that ties every dollar of fund distribution to one of four tiers in each year of the fund life.

## Designed for term-sheet sensitivity

Every input - fund size, GP commit %, hurdle, carry %, capital-call schedule, distribution schedule - is a single Assumptions cell. Flex hurdle from 8% to 6% or carry from 20% to 25% and watch the LP MoIC, GP carry $, and pref-achieved flag move on the Dashboard immediately.

## Honest about pref accrual and catch-up

The preferred return accrues on outstanding LP capital (post return-of-capital) with a mid-year convention on the year's new contributions - not on stale called-and-returned capital. The GP catch-up uses the standard T3 = T2 × Carry / (1 - Carry) formula, so once Tier 4 settles in-the-money, the GP's carry share of total post-capital profit converges exactly to the carry rate.

## Built for the GP-LP economics conversation

When the question is "given this fund's call and distribution schedule, what does the LP get and what does the GP earn in carry?", a four-tier European waterfall with explicit per-year cumulative payments is the cleanest answer. This template gives PE / VC fund managers and LP underwriters an audit-ready waterfall that ties every dollar of fund distribution to one of four tiers in each year of the fund life.

## Designed for term-sheet sensitivity

Every input - fund size, GP commit %, hurdle, carry %, capital-call schedule, distribution schedule - is a single Assumptions cell. Flex hurdle from 8% to 6% or carry from 20% to 25% and watch the LP MoIC, GP carry $, and pref-achieved flag move on the Dashboard immediately.

## Honest about pref accrual and catch-up

The preferred return accrues on outstanding LP capital (post return-of-capital) with a mid-year convention on the year's new contributions - not on stale called-and-returned capital. The GP catch-up uses the standard T3 = T2 × Carry / (1 - Carry) formula, so once Tier 4 settles in-the-money, the GP's carry share of total post-capital profit converges exactly to the carry rate.

## Workbook structure

### Cover

Workbook overview, sheet legend, and tab-colour key for navigation.

- Title and scope framing
- Sheet-by-sheet purpose summary
- Tab-colour legend

### Assumptions

Every driver in one sheet: fund terms, year schedule, status thresholds.

- Fund size, GP commitment %, hurdle rate, carry %, mgmt fee, fund life
- 10-year capital-call % and gross-distribution % schedules
- Green and amber LP MoIC thresholds, reconciliation tolerance

### Fund_Flows

Per-year and cumulative capital called, gross distribution, and mgmt fee.

- Capital called = Cap_Call_Pct × Fund_Size
- LP capital called = Capital × (1 - GP_Commit_Pct); GP capital called = Capital × GP_Commit_Pct
- Cumulative LP and GP capital roll forward across the 10 years
- Gross distribution = Dist_Pct × Fund_Size; cumulative distribution rolls forward
- Mgmt fee = Mgmt_Fee_Pct × Fund_Size per year

### Waterfall

Four-tier European waterfall on a cumulative basis with an annual flow strip.

- T1 total cum = MIN(Distribution cum, Total capital cum); split LP / GP pro-rata by capital share
- T2 LP cum = MIN(Pref accrued cum, Distribution cum less T1)
- Pref accrued each year on outstanding LP capital × hurdle plus new LP contributions × hurdle / 2
- T3 GP catch-up claim = T2 × Carry / (1 - Carry); paid up to available distribution
- T4 remainder split (1 - Carry) to LP and Carry to GP
- LP and GP distribution = sum of respective tier payments; annual flow = cumulative delta

### LP_GP_Returns

Per-year LP and GP contribution, distribution, profit, MoIC, DPI plus GP carry $.

- LP contribution cum, distribution cum, profit cum, MoIC, DPI
- GP contribution cum, distribution cum, profit cum, carry $ cum, MoIC
- Carry share of total profit (should converge to Carry % when fund is in-the-money)

### Dashboard

Fund-life-end headline metrics with traffic-light status.

- Fund terms: size, GP commit %, hurdle, carry %, life
- LP committed, distributed, profit, MoIC, DPI, pref-achieved Yes / No
- GP committed, distributed, carry $, MoIC, carry share of profit
- LP MoIC status: On track / Watch / Off track against thresholds
- Reconciliation check: LP + GP distribution equals fund distribution within tolerance

### Cover

Workbook overview, sheet legend, and tab-colour key for navigation.

- Title and scope framing
- Sheet-by-sheet purpose summary
- Tab-colour legend

### Assumptions

Every driver in one sheet: fund terms, year schedule, status thresholds.

- Fund size, GP commitment %, hurdle rate, carry %, mgmt fee, fund life
- 10-year capital-call % and gross-distribution % schedules
- Green and amber LP MoIC thresholds, reconciliation tolerance

### Fund_Flows

Per-year and cumulative capital called, gross distribution, and mgmt fee.

- Capital called = Cap_Call_Pct × Fund_Size
- LP capital called = Capital × (1 - GP_Commit_Pct); GP capital called = Capital × GP_Commit_Pct
- Cumulative LP and GP capital roll forward across the 10 years
- Gross distribution = Dist_Pct × Fund_Size; cumulative distribution rolls forward
- Mgmt fee = Mgmt_Fee_Pct × Fund_Size per year

### Waterfall

Four-tier European waterfall on a cumulative basis with an annual flow strip.

- T1 total cum = MIN(Distribution cum, Total capital cum); split LP / GP pro-rata by capital share
- T2 LP cum = MIN(Pref accrued cum, Distribution cum less T1)
- Pref accrued each year on outstanding LP capital × hurdle plus new LP contributions × hurdle / 2
- T3 GP catch-up claim = T2 × Carry / (1 - Carry); paid up to available distribution
- T4 remainder split (1 - Carry) to LP and Carry to GP
- LP and GP distribution = sum of respective tier payments; annual flow = cumulative delta

### LP_GP_Returns

Per-year LP and GP contribution, distribution, profit, MoIC, DPI plus GP carry $.

- LP contribution cum, distribution cum, profit cum, MoIC, DPI
- GP contribution cum, distribution cum, profit cum, carry $ cum, MoIC
- Carry share of total profit (should converge to Carry % when fund is in-the-money)

### Dashboard

Fund-life-end headline metrics with traffic-light status.

- Fund terms: size, GP commit %, hurdle, carry %, life
- LP committed, distributed, profit, MoIC, DPI, pref-achieved Yes / No
- GP committed, distributed, carry $, MoIC, carry share of profit
- LP MoIC status: On track / Watch / Off track against thresholds
- Reconciliation check: LP + GP distribution equals fund distribution within tolerance

## Features

- **Four-tier European waterfall on a cumulative basis:** Each tier is paid in priority order on cumulative distribution available, so re-running with a different distribution schedule re-orders the timing of tier payments without breaking the math. Annual flows fall out as cumulative tier deltas.
- **Honest preferred-return accrual:** LP pref accrues on outstanding LP capital after return-of-capital payments, with a mid-year convention on new contributions. Pref is not over-accrued on capital that has already been returned in the same year.
- **Catch-up that resolves to carry %:** GP catch-up brings GP's share of post-capital profit up to the carry rate using T3 = T2 × Carry / (1 - Carry). After Tier 4 settles in-the-money, the dashboard confirms GP's carry share of total profit equals the carry percentage.

## Use cases

- **Fund term-sheet review:** Stress hurdle, carry %, and GP commitment on Assumptions and watch the LP MoIC, GP carry $, and pref-achieved flag move on Dashboard. Designed for the IC pre-close conversation about the GP-LP economics package.
- **LP back-of-envelope underwriting:** Drop in a fund's actual call and distribution schedule (as % of fund size) and read the LP MoIC, DPI, and GP carry $ off the dashboard. The Waterfall sheet shows tier-by-tier where each dollar landed in each year of the fund life.
- **Education and audit:** Each tier is a separate row on the Waterfall sheet so the four-tier mechanic is fully transparent. A reconciliation check on the Dashboard ties LP + GP distribution exactly back to fund distribution at every year.

## Frequently asked questions

### What is carried interest?

Carried interest is the GP's share of investment profits in a private fund (PE, VC, real-estate, infrastructure). The standard structure pays GP a percentage (typically 20%) of profits above a preferred return to LPs (typically 8%), after LPs have first recovered their contributed capital. It is the core economic incentive that aligns GP and LP.

### European vs American waterfall - which is this?

This is the European (whole-fund) waterfall. LPs receive all contributed capital and the full preferred return before the GP earns any carry. American waterfalls pay carry deal-by-deal subject to a fund-level clawback at termination. European is more LP-friendly and is the dominant convention in PE buyout funds; American is more common in US VC.

### How is the preferred return calculated?

Pref accrues annually on outstanding LP capital - capital that has been called and not yet returned. The model uses a mid-year convention on new contributions (half a year of accrual on the year's new capital) and full-year accrual on the outstanding balance carried in. Pref is not reduced when paid; it is satisfied by Tier 2 distribution against the cumulative accrued amount.

### What is GP catch-up?

Once LP has been paid back its capital and preferred return, the GP needs to receive enough of the next dollars to bring its share of post-capital profit up to the carry rate. With 100% catch-up at 20% carry, the GP receives 100% of Tier 3 dollars until its cumulative carry equals 20% of cumulative post-capital profit (T2 + T3 combined). Tier 4 then splits remaining dollars 80/20.

### Does the model handle clawback?

Not explicitly. Clawback is the LP's claim against the GP if carry was paid out per-deal early in the fund and the fund ultimately fails to clear the hurdle. European waterfall computed on a cumulative basis (as here) cannot pay carry until pref is fully covered, so clawback risk is zero by construction. Use the American-waterfall variant if clawback exposure is a live question.

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