How evolving fund structures are shaping carried interest arrangements

A familiar term for most readers, carried interest, or 'carry', is the share of a fund's profits that is allocated to the manager as a performance incentive once investors have received an agreed return. It’s a defining economic feature of private equity, aligning fund manager and investor interests. But as private capital evolves, so does how carried interest is structured, calculated, and administered.

Where carry once accommodated a single closed-ended fund with a straightforward waterfall (the order in which profits are distributed between investors and the manager), modern arrangements now contain complex structures with multiple fund vehicles, differing strategies and cross-border participation.

As we look toward 2026 - what does this mean for fund managers hoping to stay ahead of the curve?

Beyond the traditional waterfall 

The traditional carried interest model was simple - 20 per cent of fund profits paid to the general partner once investors had received back their contributed capital plus a preferred return (the 'hurdle rate').  

The picture is now more complex. The rise of GP-led secondary transactions (namely continuation vehicles), net-asset-value (NAV)-based financing deals, co-investment funds, multi-strategy platforms, hybrid funds, and evergreen structures has reshaped the old model. 

Continuation funds, for example, allow managers to move assets from one fund to another, enabling existing investors to roll over their interests and new investors to join at different stages of the investment’s life, so that a single asset can span multiple fund vintages and investor groups and a manager's performance may be assessed across overlapping timelines rather than one closed-ended fund period.

The shift away from the traditional waterfall reflects a sophisticated market that requires fund managers, investors, and their advisors to think strategically about how carry is calculated. Another consideration is how carry will flow across these new structures while ensuring that robust administration rules are in place to align manager and investor interests.

Complex waterfall structures 

Multi-tiered waterfalls are now common, incorporating multiple hurdles and corresponding catch-ups, with distributions made on multiple classes or series of interests. Rather than a single profit hurdle, there are successive tiers, each with their own return threshold and profit-sharing ratios, so that different participants or strategies receive carry once their specific performance targets are met.

Getting the sequencing right - who gets paid, when, and in what order - is vital. A well-constructed waterfall helps maintain trust and transparency between GPs and LPs.

In response, managers are turning to technology and automation to manage this complexity. Technology-driven carry administration also allows for future changes in strategies, vehicles or personnel.

Interim valuations and crystallisation 

In traditional closed-ended private equity funds, carry is calculated on realised gains and crystallised at the fund-level waterfall. However, private capital’s movement beyond the traditional fund model means that carry is increasingly being valued, accrued or partially crystallised based on NAV or unrealised gains, especially in hybrid or open-ended structures.

This raises important practical and valuation questions around when interim valuations should trigger carry accruals or distributions, how unrealised or hard-to-value assets should be treated, and how NAV-based carry should be reconciled with subsequent realisations.

Continuation can mean innovation

Innovation across private capital is reshaping carry, with GP-led continuation funds resulting in increased rollover or recycled carry (where entitlements are reinvested or deferred into the new vehicle rather than being fully distributed), allowing teams to participate in future upside while maintaining alignment with investors.

Deal- and strategy-specific carry pools are also gaining ground within multi-strategy platforms, tying rewards more closely with team performance by linking carry entitlements to specific deal or strategy outcomes rather than overall fund performance.

NAV-based carry models, like performance fee structures in hedge or hybrid funds, are favoured for open-ended vehicles. LP-protective mechanisms, such as offset clauses and blended waterfalls (where carry is calculated on a combination of realised and unrealised performance to reflect the fund's overall results), encourage transparency and safeguard alignment of interests between investors and managers.

Documentation and implementation

Clear documents are key to ensuring that complex carry arrangements are properly implemented and administered. Care should be taken to ensure that partnership agreements, carry plans, management agreements, award letters, and investor communications reflect all parties’ commercial intent and do not jeopardise the intended tax or regulatory treatment.  

As fund structures become bespoke, so does the need for precise implementation of carry arrangements. Effective execution and administration are critical to preserving commercial intent and ensuring arrangements remain workable over time. 

More flexibility, more responsive to complexity 

Carried interest arrangements are becoming complex as a response to modern fund complexity. Carry allocation is moving beyond a single fund-level basis, shifting towards more flexible, asset-aware, NAV-sensitive pools that consider both the assets involved and the key management talent.  

Ultimately, the core principles of an effective carry arrangement remain unchanged: transparent commercial terms, alignment of LP and GP interests, reward for management outperformance and ease of execution and administration.