Author: Gert-Tom Draisma / www.TristanFinance.com

First published: 24th of September 2026

Latest update: 5th of October 2026

Status: First Draft

1. The Purpose of a Carry Plan

A carry plan determines how the carried interest available to a private equity organisation is shared among the people and other participants who contribute to the organisation and its investments.

At one level, this is an allocation problem.

If €20 million of carried interest is available to a participant pool, the carry plan determines who participates in that €20 million and in what proportion.

But that description is incomplete.

A carry plan is also an incentive system.

The allocation of carried interest can influence who joins the organisation, who stays, how people collaborate, how responsibility is distributed, how investment performance is rewarded and how ownership economics move from one generation of partners to the next.

A carry plan therefore operates simultaneously as:

Economic Allocation + Incentive Mechanism + Retention Mechanism + Recognition System + Succession Mechanism

These functions can reinforce one another.

They can also conflict.

A plan that provides the strongest reward for historical contribution may not provide the strongest incentive for future performance.

A plan that rewards individual investment results may weaken incentives to support investments led by colleagues.

A plan that protects the economics of existing partners may make it difficult to attract a new senior partner.

A plan that reserves substantial carry for future hires may reduce the economics available to the current team.

Carry-plan design is therefore not simply a matter of dividing 100 points between a group of people.

It begins with a more fundamental question:

What is the carry plan intended to achieve?

2. Carry as Long-Term Economic Alignment

Private equity has an unusually long economic cycle.

An investment may be sourced today, acquired next year, held for five years and sold several years after that.

A fund itself may remain economically active for a decade or longer.

The people responsible for creating the value may therefore contribute over a long period before the ultimate economic result becomes known.

Carried interest is well suited to this environment because the economic reward can develop alongside the underlying investments.

Conceptually:

Investment Success → Fund Performance → Carry Generated → Participant Economics

The participant therefore has an economic interest in the long-term success of the investments rather than merely in completing an individual transaction.

This is one of the fundamental purposes of a carry plan:

Long-Term Value Creation → Long-Term Participant Reward

However, the strength of that alignment depends heavily on how the carry plan is designed.

3. Carry Is Not Salary

Salary compensates an individual primarily for performing a role during a particular period.

A bonus may reward annual or shorter-term performance.

Carry is different.

Its value may depend upon investment outcomes occurring many years after the work that originally created the opportunity.

A participant can therefore simultaneously have three different forms of compensation:

Salary → Compensation for Current Role

Bonus → Reward for Shorter-Term Performance

Carry → Participation in Long-Term Investment Economics

The distinction is important because each mechanism can influence behaviour differently.

An annual bonus can reward activities that are observable during the year.

Carry can expose the participant to the longer-term consequences of investment decisions.

That makes carry particularly powerful, but it also makes its design more difficult.

The people who contributed to an investment at the beginning may no longer be with the firm when it is realised.

People who join later may make important contributions to an investment they did not originate.

A carry plan must determine how these different contributions are reflected in economic participation.

4. Carry as an Incentive Mechanism

The incentive effect of carry arises because the participant's economic outcome is linked to the success of the underlying investments.

In simplified form:

Better Investment Outcomes → More Carry → Greater Participant Value

But the relationship is not necessarily that simple.

The participant must first know which economics they participate in.

If the participant owns a share of the entire fund carry pool, the incentive relates broadly to the performance of the fund.

If the participant participates only in particular investments, the incentive may be concentrated on those investments.

If different percentages apply to different deals, the participant's economic incentives may differ significantly across the portfolio.

Consequently:

Carry Allocation Architecture → Participant Economic Exposure → Participant Incentives

This is why allocation architecture cannot be treated purely as an administrative choice.

It can affect behaviour.

5. Attraction

Carry can be an important component of the economic proposition offered to senior private equity professionals.

A prospective partner considering joining a firm may compare:

• salary;
• annual bonus;
• management-company ownership;
• co-investment opportunities;
• existing carry interests;
• future carry allocations;
• vesting;
• participation in existing funds;
• participation in future funds;
• and the potential value of those interests.

The headline number alone may be insufficient.

An offer of “10% carry” can mean very different things depending on the denominator, the relevant fund or pools, the value already embedded in those pools, the vesting provisions and the participant's exposure to future funds.

Therefore:

Headline Carry Percentage ≠ Economic Value of Carry Offer

A carry plan designed to attract senior talent must be capable of accommodating new participants without creating unintended transfers of historical value or unacceptable dilution for existing participants.

This creates one of the recurring tensions in carry-plan design:

Protect Existing Economics ↔ Attract New Talent

6. Retention

Carry can also create a powerful incentive to remain with an organisation.

If substantial future economic value depends upon continued participation, leaving the firm may have significant economic consequences.

Historically, carry-plan design has therefore been closely connected with employee retention and the long-term incentive function of carried interest. IMG_8201.HEIC

However, retention can arise through several mechanisms.

The participant may have:

• unvested interests;
• participation in future investments;
• expected allocations in future funds;
• unrealised vested carry;
• future distributions from existing investments;
• or expectations of increasing participation as seniority grows.

These should not be treated as the same thing.

A participant may be fully vested in Fund I but still have strong economic reasons to remain because Fund II and Fund III allocations are expected to become increasingly valuable.

Carry therefore creates both:

Existing Economic Value

and:

Expected Future Economic Opportunity

Both can contribute to retention.

7. Rewarding Historical Contribution

Private equity organisations often contain people who have contributed to the business for very different periods.

A founder may have spent twenty years building the firm.

A senior partner may have sourced some of its most successful investments.

A younger partner may have joined only recently but be expected to lead the next generation.

A carry plan must decide how much weight to place on historical contribution.

There are legitimate reasons to reward it.

The existing investment platform may exist because earlier partners:

• raised the funds;
• developed the investment strategy;
• built LP relationships;
• recruited the team;
• sourced investments;
• developed the firm's reputation;
• created operating infrastructure;
• or assumed substantial entrepreneurial risk.

Ignoring that history can itself create unfair economics.

But allocating carry primarily according to historical contribution creates another problem.

Carry is also intended to incentivise future performance.

This produces a central tension:

Reward Historical Contribution ↔ Incentivise Future Contribution

A carry plan needs to determine where on that spectrum it wishes to sit.

8. Incentivising Future Contribution

The value of a private equity firm depends not only on what has already been achieved but also on what the current team will achieve in the future.

A younger partner may be expected to:

• originate future investments;
• lead future transactions;
• manage existing portfolio companies;
• raise future funds;
• develop new strategies;
• recruit new investment professionals;
• or eventually lead the organisation.

If almost all carry remains concentrated with the original founders, the economic incentives of the next generation may become increasingly disconnected from their responsibilities.

The opposite extreme can also create problems.

Transferring substantial economics to new participants without recognising the value already created by existing partners can produce unintended wealth transfers and internal conflict.

Carry-plan design therefore needs to distinguish between:

Value Already Created

and:

Value Yet to Be Created

That distinction becomes particularly important when interests are granted after a fund has already accumulated substantial value.

9. Carry and Performance

A natural principle would appear to be:

People who create more value should receive more carry.

The difficulty lies in determining who created the value.

Private equity performance is typically the result of a chain of activities rather than a single act.

For example:

Strategy → Origination → Due Diligence → Execution → Financing → Governance → Operational Improvement → Exit

Different people may be responsible for different stages.

An investment partner may originate an opportunity.

A principal may perform much of the transaction execution.

An operating partner may lead a substantial transformation of the business.

Another partner may ultimately negotiate the exit.

Who created the investment return?

There may be no objectively correct answer.

This is one of the reasons why participant carry allocation differs fundamentally from fund waterfall calculation.

Once the economic rules and data have been established, a fund waterfall can often be calculated deterministically.

Performance attribution between individuals frequently contains judgement.

Therefore:

Waterfall Calculation Can Be Deterministic

while:

Carry Allocation Design Contains Judgement

10. The Attribution Problem

Consider an investment acquired for €100 million and subsequently sold for €250 million.

The investment has created substantial value.

Assume:

• Partner A originated the investment;
• Partner B led the acquisition;
• Principal C performed much of the due diligence;
• Operating Partner D led an operational restructuring;
• Partner E joined the board after three years;
• Partner F led the eventual exit.

How should the resulting carry be divided?

One approach could reward origination heavily.

Another could place greater weight on execution.

Another could allocate economics according to seniority.

Another could treat the investment as a collective firm achievement.

Another could allocate different percentages to each participant based upon an investment committee assessment.

All could potentially be reasonable.

The economic result is therefore partly a consequence of the firm's philosophy about value creation.

11. Self-Assessment and Performance Attribution

Performance attribution becomes even more difficult when participants assess their own contribution.

Individuals naturally have more detailed knowledge of their own work than of the work performed by others.

They may therefore attribute a greater share of success to their own contribution.

Historical practitioner discussion of carry-plan design has identified this difficulty explicitly: individuals may assess their contribution to successful investments differently from the way colleagues assess it, making allocation decisions inherently sensitive. IMG_8202.HEIC

This is not necessarily evidence of bad faith.

It is a structural problem.

Investment performance is jointly produced, contributions are difficult to measure and outcomes become known only after the work has occurred.

A carry plan therefore benefits from allocation principles that are sufficiently clear that every allocation does not become a renegotiation of individual contribution.

12. Individual Performance Versus Collective Performance

A fundamental design choice is whether carry should primarily reward individual performance or collective performance.

At one extreme:

Individual Investment Performance → Individual Carry

At the other:

Fund Performance → Shared Team Carry

Both have advantages.

Individual allocation can create a close connection between contribution and reward.

Collective allocation can encourage participants to support investments across the portfolio rather than focusing only on investments in which they have direct economics.

This creates another important tension:

Individual Attribution ↔ Collective Performance

Neither approach is universally superior.

The appropriate balance depends upon the investment strategy, organisational structure and culture of the manager.

13. The Free-Rider Problem

A broad fund-level carry pool creates collective exposure to the fund's performance.

That can encourage collaboration.

But it can also create a potential free-rider problem.

Suppose ten partners participate equally in a carry pool.

If three partners create most of the investment value while the other seven contribute materially less, the economic allocation may eventually appear disconnected from contribution.

The stronger performers may ask why they should continue generating disproportionate value while sharing the resulting carry broadly.

A carry plan may attempt to address this through:

• differentiated carry percentages;
• periodic reallocations;
• different allocations in subsequent funds;
• deal-specific pools;
• performance-based additional awards;
• or other mechanisms.

Each solution introduces its own complexity.

14. The Silo Problem

Deal-specific allocation can create the opposite problem.

Suppose Partner A receives substantial carry in Investments A and B but very little in Investments C and D.

Partner B has the reverse exposure.

The economic incentive may encourage each partner to focus disproportionately on the investments in which they have the greatest personal participation.

In extreme cases:

Deal-Specific Economics → Deal-Specific Attention

rather than:

Fund Economics → Portfolio-Wide Attention

This may weaken collaboration.

A participant may be economically incentivised to spend the next hour helping “their” portfolio company rather than another investment where their expertise might create greater value for the fund.

This does not mean deal-level carry is undesirable.

It means the incentive consequences should be understood.

15. Allocation Architecture Shapes Behaviour

The preceding examples lead to a broader principle:

Allocation Architecture → Economic Incentives → Potential Behaviour

Fund-level allocations may encourage collective responsibility.

Deal-level allocations may strengthen individual accountability.

Vintage-based allocations can distinguish contributions made during different periods.

Strategy-specific pools may align specialist teams with the performance of the strategies they manage.

Hybrid plans may attempt to combine these benefits.

But every additional layer creates both economic consequences and administrative complexity.

The plan should therefore be designed deliberately rather than allowing the allocation structure to emerge accidentally over time.

16. Origination

Origination often receives particular attention in private equity because without an investment opportunity there can be no investment return.

A partner who develops a proprietary opportunity may therefore argue that origination deserves substantial economic recognition.

But origination alone does not create a successful investment.

A poorly executed acquisition can destroy the value of an excellent opportunity.

Similarly, a strong acquisition can subsequently fail because of poor portfolio management.

A carry plan therefore needs to determine how much emphasis it places on:

Finding the Opportunity

versus:

Converting the Opportunity into Investment Return

There is no universal answer.

Different investment strategies can reasonably reach different conclusions.

17. Execution

Transaction execution can involve:

• valuation;
• due diligence;
• negotiation;
• financing;
• structuring;
• investment committee preparation;
• legal documentation;
• management assessment;
• and transaction completion.

The work may be performed by several levels of the investment team.

If carry is intended to reward contribution rather than merely seniority, execution creates an important attribution problem.

The partner responsible for the transaction may have formal leadership responsibility while principals and associates perform substantial portions of the analytical and execution work.

The plan therefore needs to determine whether carry primarily rewards:

Responsibility

Contribution

Seniority

or some combination of them.

18. Portfolio Management

Value creation continues after acquisition.

Portfolio management may involve:

• strategic development;
• management changes;
• acquisitions;
• disposals;
• financing changes;
• international expansion;
• operational improvements;
• cost reduction;
• digital transformation;
• governance;
• and preparation for exit.

In some investments, most of the ultimate value creation may occur during the holding period.

A carry system focused primarily on origination can under-recognise these contributions.

This becomes particularly relevant for operating partners and specialist professionals whose contribution may be substantial but whose role differs from that of traditional deal partners.

19. Exit

Exit performance can also materially affect investment returns.

Timing, buyer selection, preparation, financing and negotiation can all influence realised value.

The individual who originally sourced an investment may no longer be involved when the investment is sold.

Another partner may create substantial incremental value through the exit process.

A deal-level allocation established permanently at acquisition may therefore fail to reflect later contributions unless the carry plan allows subsequent changes.

But permitting frequent retrospective changes creates its own problems.

Participants may no longer know with sufficient certainty what they own.

The plan therefore faces another tension:

Allocation Certainty ↔ Ability to Recognise Subsequent Contribution

20. Seniority

Many carry plans allocate larger interests to more senior participants.

There are obvious reasons for this.

Senior partners may:

• bear greater responsibility;
• have longer track records;
• originate more investments;
• maintain key LP relationships;
• sit on investment committees;
• manage junior professionals;
• contribute to fundraising;
• and have played a substantial role in building the firm.

Historical carry-plan discussions have used seniority-based allocation approaches as one possible starting point while also recognising that no exact formula can determine the appropriate allocation between individuals. IMG_8201.HEIC

Seniority can therefore be an important input.

But it should not automatically be confused with contribution.

Seniority ≠ Necessarily Current Value Creation

A plan based entirely on seniority can eventually become disconnected from the firm's future leadership and performance.

21. Firm-Building Contributions

Not all value creation occurs at investment level.

A partner may contribute significantly by:

• raising capital;
• developing LP relationships;
• recruiting talent;
• establishing a new office;
• developing a new strategy;
• building operating capabilities;
• improving investment processes;
• strengthening governance;
• developing the firm's reputation;
• or managing the organisation itself.

These activities may have little direct connection to a particular portfolio investment.

Yet they can create substantial value for the private equity organisation.

A purely deal-attribution-based carry plan may therefore under-reward important firm-building activities.

This is another argument for considering both:

Investment Contribution

and:

Firm Contribution

when designing participant economics.

22. Non-Investment Professionals

The same question arises for professionals outside the traditional investment team.

A private equity organisation may depend upon:

• finance;
• operations;
• legal;
• tax;
• investor relations;
• fundraising;
• technology;
• data;
• risk;
• compliance;
• human resources;
• and other specialist functions.

Whether these professionals participate in carry, and to what extent, is a design decision.

Some organisations may reserve carry primarily for investment professionals.

Others may use carry more broadly to align senior non-investment personnel with the long-term success of the firm.

Again, there is no universal allocation rule.

The relevant question is what behaviour and alignment the organisation wishes to create.

23. Carry as Recognition

Carry has an economic value.

It can also have symbolic value.

Receiving carry can indicate that an individual is regarded as part of the long-term economic group of the firm.

The size of the allocation can similarly communicate how the organisation values the participant's contribution and future role.

Historical practitioner discussion has noted that participants may view carry not only in monetary terms but also as an indication of status and recognition within the organisation. IMG_8203.HEIC

This can make apparently small allocation differences disproportionately important.

Consider two newly promoted partners.

Partner A receives 10 points.

Partner B receives 8 points.

Even if the expected current monetary difference is modest, Partner B may interpret the allocation as evidence that the organisation regards Partner A as more important.

Carry can therefore operate simultaneously as:

Economic Reward + Incentive + Recognition + Signal

Ignoring the signalling function can create unintended organisational consequences.

24. Relative Economics Matter

Participants may care about both absolute and relative economics.

Suppose a participant's carry allocation increases from 5 points to 7 points.

In isolation, this is a 40% increase.

But suppose comparable colleagues increase from 5 points to 10 points.

The participant may perceive the change very differently.

Therefore:

Absolute Carry Increase ≠ Necessarily Improved Relative Position

Carry-plan design needs to recognise that participants can compare themselves with colleagues.

This is particularly relevant where allocations are discretionary and participants have visibility into each other's interests.

Transparency can improve understanding, but it can also make relative differences more visible.

25. Transparency

A carry plan can range from highly transparent to highly opaque.

At one extreme, participants may know:

• the total size of the pool;
• their own points;
• colleagues' points;
• the allocation methodology;
• current estimated carry value;
• historical distributions;
• vesting;
• and changes through time.

At the other extreme, participants may know little more than their own nominal allocation.

Historical carry-plan administration has shown a trend towards providing participants with greater information regarding their carry positions, including points, vesting and unrealised values. IMG_8217.HEIC

Transparency can strengthen the incentive effect because participants better understand what they own.

But transparency also requires reliable information.

Transparency Without Reliable Data ≠ Effective Transparency

A participant statement that is detailed but wrong can be worse than a simple statement that is clearly defined.

26. Understandability

A carry plan can be economically sophisticated while still failing as an incentive mechanism if participants do not understand it.

Suppose an employee is told:

“You have 12.5 carry points.”

That statement may have little motivational value if the participant does not understand:

• 12.5 points out of how many;
• in which carry pool;
• what the pool currently represents;
• whether the points are vested;
• what value has already been realised;
• what value remains unrealised;
• or how future allocations may change.

Therefore:

Carry Exists ≠ Participant Understands Carry

and:

Participant Ownership ≠ Perceived Economic Value

A well-designed carry plan should be capable of being explained.

Complexity may sometimes be economically necessary.

Unnecessary complexity is not.

27. Points and Motivation

Carry points can be useful because they create a convenient unit for allocating economic interests.

But points are abstract.

A participant may understand that they own 10 points without having any intuitive understanding of what those points are worth.

The incentive effect becomes stronger when the relationship can be understood:

Carry Points → Economic Percentage → Carry Pool → Indicative Economic Value

For example:

Participant points: 10

Total relevant points: 100

Economic interest: 10%

Current relevant carry value: €15 million

Indicative participant carry:

€15m × 10% = €1.5m

The €1.5 million may still be unrealised, unvested or subject to other conditions.

But translating points into economics can make the plan substantially more understandable.

28. Carry Value Is Not Guaranteed Value

Greater transparency should not result in unrealised carry being presented as guaranteed compensation.

If a participant's current indicative carry position is €2 million, that amount may subsequently increase, decrease or disappear.

Therefore participant communication should preserve the distinction between:

Current Indicative Economic Position

and:

Guaranteed Cash Entitlement

The same principles that apply to unrealised carry at fund level apply at participant level.

Current Carry Value ≠ Final Carry Value

A participant statement should make that distinction understandable.

29. Fairness

Carry-plan design inevitably raises questions of fairness.

But fairness can mean different things.

One participant may define fairness as:

People should receive carry according to the value they create.

Another may define it as:

People at the same level should receive similar economics.

Another may emphasise historical contribution.

Another may emphasise future responsibility.

Another may believe that everyone working on the fund should share broadly in its success.

These concepts are not necessarily compatible.

Therefore:

Fairness Is Not a Single Allocation Formula

A robust carry plan should instead establish principles sufficiently clear that participants can understand why allocations differ.

30. Equality Versus Equity

Equal allocation and equitable allocation are not necessarily the same.

Suppose four partners each receive 25%.

That is equal.

But if one partner works half-time, another originated most of the portfolio, another joined only recently and another is expected to retire next year, equal allocation may or may not be regarded as equitable.

Conversely, attempting to quantify every difference in contribution can create an excessively complicated and contentious allocation process.

Carry-plan design therefore often requires balancing:

Simplicity ↔ Differentiation

Too little differentiation can weaken the connection between contribution and reward.

Too much differentiation can turn carry allocation into a continuous internal negotiation.

31. Stability

Carry plans benefit from a degree of stability.

Participants make career decisions partly based on expectations about their future economics.

If allocations change continuously or unpredictably, the incentive value of the plan can weaken.

A participant who believes that a successful investment will simply cause their future allocation to be renegotiated may place less value on the existing grant.

Therefore:

Economic Incentive Requires Reasonable Economic Predictability

This does not mean allocations can never change.

Promotions, new hires, changing responsibilities and succession may require changes.

But the mechanism for change should be understandable.

32. Flexibility

Stability has an opposite requirement: flexibility.

A private equity firm changes over time.

People join.

People leave.

Strategies grow.

New offices open.

Partners retire.

New funds are raised.

Individuals become more or less important to the organisation.

A carry plan that cannot accommodate these changes can become obsolete.

The design challenge is therefore:

Stability ↔ Flexibility

A robust plan should provide participants with meaningful economic certainty while retaining sufficient flexibility to respond to legitimate organisational change.

33. Existing Partners and New Partners

The tension becomes particularly visible when a new partner joins.

Existing partners may already have created substantial economic value.

The new partner may nevertheless be critical to future success.

If the new partner receives no meaningful carry, recruitment may fail.

If the new partner immediately receives a substantial share of existing value, current partners may feel that economics they created have been transferred away.

The design problem can be represented as:

Existing Partners → Historical Value

New Partner → Future Contribution

The carry plan needs to determine where the boundary lies.

Possible approaches include:

• participation in all existing economics;
• participation only in future funds;
• participation only in future investments;
• participation in existing funds subject to an opening economic threshold;
• separate carry pools;
• vintage-specific allocations;
• or combinations of these approaches.

Part VII examines these mechanics in detail.

34. Succession

The same problem occurs at a larger scale when leadership passes from one generation to another.

Founders may own substantial carry across several existing funds.

The next generation may increasingly manage those investments and become responsible for raising and investing future funds.

A successful succession process may therefore require the economic centre of gravity to move gradually.

Conceptually:

Founder Generation → Existing Economics

Transition Generation → Increasing Economics

Future Leadership → Future Economics

The transition may take place over several fund vintages.

This is one reason carry ownership should not be viewed as a single permanent cap table.

The economics may deliberately evolve from one fund to the next.

35. Carry Across Fund Generations

Consider three fund vintages.

The table tells a story.

The founders retain significant economics.

But the next generation gradually receives greater participation.

No single fund needs to bear the full economic cost of succession.

Instead:

Successive Fund Vintages → Progressive Economic Transition

This can create a more orderly transfer of economic participation.

36. Management Company Ownership Versus Carry Ownership

Succession also illustrates why management-company ownership and carry ownership should not be confused.

A founder could own 40% of the management company but only 20% of Fund III carry.

A younger partner could own 5% of the management company but 25% of Fund III carry.

These positions serve different purposes.

Management-company ownership may provide exposure to fee income, enterprise value, governance or other economics.

Carry ownership provides exposure to investment performance.

Therefore:

Ownership of the Management Company ≠ Ownership of Carry

The two may be coordinated.

They do not need to be identical.

37. Future Funds as an Incentive

A participant's economic incentive does not depend solely on existing carry.

Expected participation in future funds can be extremely important.

Suppose a principal currently owns 2% of Fund II carry but expects:

5% of Fund III if promoted;

8% of Fund IV if subsequently admitted as a partner.

The expected future progression itself can create a retention and performance incentive.

The participant's economic relationship with the firm therefore includes both:

Current Carry Ownership

and:

Expected Future Carry Opportunity

The second is less certain, but it can still influence behaviour.

38. Promotions

Promotions create another allocation decision.

Suppose a principal owns 5% of a carry pool and is promoted to partner.

Should the interest immediately increase to 10%?

Should the increase apply only to future funds?

Should it apply to future investments within the existing fund?

Should it apply retrospectively to the existing pool?

These alternatives have different economics.

A promotion therefore does not automatically imply one particular carry treatment.

Change in Role ≠ Automatically Change in Historical Carry

The carry plan should determine how changes in organisational responsibility translate into changes in economic participation.

39. Departures

A carry plan must also anticipate that participants will leave.

A departure can raise several separate questions:

• Does the participant retain vested carry?
• What happens to unvested interests?
• Does the participant continue to participate in existing investments?
• Does participation cease immediately?
• Are forfeited interests reallocated?
• Do they return to a reserve?
• Do remaining participants benefit?
• Does the departing participant remain responsible for clawback?
• What happens to future distributions?

These questions belong primarily to Chapter 7.

But they also affect plan design.

A carry plan designed without considering participant departures is incomplete.

40. The Value of Unallocated Carry

A reserved or unallocated pool can provide flexibility.

Suppose 15% of the carry pool is initially reserved.

That reserve can later be used for:

• new hires;
• promotions;
• retention;
• succession;
• performance awards;
• or strategic recruitment.

This avoids the need to renegotiate existing interests every time a new grant is made.

But the reserve has an economic cost.

If 15% is genuinely reserved from inception, existing participants collectively own only 85%.

Therefore:

Flexibility Has an Economic Price

The design question is whether the flexibility created by the reserve justifies the dilution of current participants.

41. Immediate Dilution Versus Future Dilution

Even the economic effect of a reserve depends on its design.

Suppose existing participants are described as owning:

A: 40%

B: 35%

C: 25%

A separate 20% reserve is then contemplated.

There are at least two possible interpretations.

Under one approach, the reserve is created immediately and existing participants are diluted.

Under another, the participants continue to own 100% until actual grants are made.

These structures create different current economics.

Therefore:

Existence of Reserved Capacity ≠ Necessarily Immediate Economic Dilution

The plan documentation and cap-table methodology need to distinguish between authorised capacity and economically issued interests.

42. Carry Plan Governance

Because carry allocations can transfer substantial economic value, the process by which allocations are decided matters.

A carry plan may provide decision-making authority to:

• founders;
• a managing partner;
• a compensation committee;
• the GP board;
• an investment committee;
• a remuneration committee;
• or another designated body.

The governance mechanism may determine:

• initial allocations;
• additional grants;
• promotions;
• reallocation;
• reserve usage;
• amendments;
• and treatment of exceptional circumstances.

Clear governance can reduce uncertainty.

It also creates an audit trail explaining why economic ownership changed.

43. Discretion

Many carry plans contain some degree of discretion.

That may be necessary because future circumstances cannot be fully predicted when the plan is established.

But discretion has consequences.

Too little discretion can make the plan inflexible.

Too much discretion can make participant economics unpredictable.

The design problem is:

Necessary Flexibility ↔ Economic Certainty

A plan should therefore distinguish between matters that are formulaic and matters requiring judgement.

For example:

Existing Points × Defined Carry Pool = Formulaic Calculation

whereas:

How Many Additional Points Should a Newly Promoted Partner Receive? = Allocation Judgement

Separating these two types of decisions is important.

44. Rules Versus Decisions

This distinction can be formalised.

A carry plan contains rules.

The organisation subsequently makes decisions within those rules.

For example:

Rule:

The compensation committee may allocate points from the reserved pool.

Decision:

Five points are allocated to Partner D effective 1 January.

The first belongs to the carry plan.

The second is a cap-table event.

Therefore:

Carry Plan Rule → Allocation Decision → Cap Table Transaction

This distinction becomes particularly useful when designing data systems and audit trails.

45. Incentive Design and Economic Population

The choice of economic population can itself be an incentive-design decision.

Suppose the organisation operates two strategies:

Buyout

Growth

If everyone participates equally in both strategies, the economic incentive is broad.

If the teams participate only in their respective strategy pools, the incentive is more specialised.

A hybrid structure might provide:

• a firm-wide carry component;
• a strategy-specific component;
• and deal-specific additional awards.

Participant economics could then become:

Firm-Wide Carry + Strategy Carry + Deal Carry

This creates several layers of alignment simultaneously.

But it also creates several cap-table populations.

The design choice therefore has operational consequences.

46. Precision Versus Administrative Complexity

A highly granular carry plan can theoretically produce more precise attribution.

Every investment could have a separate cap table.

Every participant's contribution could be assessed separately.

Allocations could change throughout the holding period.

Different stages of value creation could receive different weights.

In theory, this could create extremely precise economic attribution.

In practice, it could become extraordinarily difficult to administer.

Therefore:

Greater Economic Granularity → Greater Administrative Complexity

At some point, additional precision may cease to create additional useful accuracy.

This creates one of the most important practical design trade-offs:

Economic Precision ↔ Administrative Complexity

A good carry plan must be operable for the entire life of the fund.

47. Precision Is Not Necessarily Accuracy

It is also important to distinguish precision from accuracy.

Suppose a carry committee assigns:

• 17.25% of Deal A carry to Partner A;
• 14.75% to Partner B;
• 12.50% to Partner C.

The percentages appear precise.

But if the underlying assessment of individual contribution is inherently judgemental, the decimal places do not make the allocation objectively accurate.

Therefore:

Greater Numerical Precision ≠ Greater Economic Objectivity

This is particularly relevant when performance attribution cannot be measured directly.

A simpler allocation methodology may sometimes be more transparent and defensible than a highly granular model based on subjective assumptions.

48. Consistency

Consistency can be an important component of perceived fairness.

If similar contributions are treated differently without an understandable reason, participants may question the allocation process.

Consistency does not require identical allocations.

It requires that differences can be explained by the plan's underlying principles.

For example:

Different Responsibility → Different Allocation

may be understandable.

But:

Same Responsibility + Similar Contribution + Unexplained Different Allocation

may be harder to defend.

A carry plan therefore benefits from principles that can be applied repeatedly across participants and fund vintages.

49. Exceptions

No carry plan can anticipate every future circumstance.

Exceptional hires, restructurings, departures, mergers of teams, new strategies or extraordinary investment contributions may require exceptions.

The important issue is how those exceptions are handled.

An exception should not silently change the economic meaning of the plan for everyone else.

It should be identifiable as an exception.

Conceptually:

Standard Rule → Documented Exception → Defined Economic Effect

This preserves the distinction between the normal architecture and one-off decisions.

50. Designing for the Entire Fund Life

Carry plans should not be designed only for the moment the fund is raised.

They need to survive the entire economic lifecycle.

That lifecycle may include:

Fundraising → Investment Period → Portfolio Development → Realisations → Successor Funds → Participant Changes → Final Distributions → Potential Clawback

During that period:

• people will join;
• people will leave;
• people will be promoted;
• values will change;
• funds will overlap;
• new strategies may emerge;
• and leadership may transition.

A plan that looks simple on day one can become extremely complicated ten years later.

The relevant design question is therefore not merely:

Can we allocate the carry today?

It is:

Can we explain, calculate and reconstruct these economics throughout the life of the plan?

51. Designing for Multiple Funds

Most established private equity firms do not operate one fund at a time.

While Fund I is realising investments, Fund II may be managing its portfolio, Fund III may be investing and Fund IV may be fundraising.

Participants may have different interests in each.

The carry plan must therefore accommodate overlapping economic generations.

For example:

Fund I → Historical Team

Fund II → Transitional Team

Fund III → Current Team

Fund IV → Future Team

These populations may overlap substantially without being identical.

This is another reason a single firm-wide percentage is often insufficient to describe an individual's carry economics.

52. Designing for Growth

Growth creates additional challenges.

A firm with five senior professionals may be able to administer carry through relatively simple arrangements.

A firm with:

• several funds;
• multiple strategies;
• several offices;
• dozens of partners;
• operating professionals;
• specialist teams;
• and hundreds of underlying investments

faces a different problem.

The carry plan should therefore consider scalability.

Simple at Inception ≠ Simple at Scale

A structure that requires manual judgement and spreadsheet adjustment for every participant change may become increasingly fragile as the organisation grows.

53. Designing for Explanation

A useful test of carry-plan design is whether the economics can be explained clearly.

A participant should ideally be able to understand:

1. which carry pools they participate in;
2. how many points or what percentage they own;
3. what those interests apply to;
4. when participation begins;
5. how interests can change;
6. what happens when new participants join;
7. what happens if they leave;
8. and how their economic value is calculated.

If those questions cannot be answered without extensive reconstruction, the plan may be unnecessarily difficult to operate.

This leads to a practical design principle:

If the Economics Cannot Be Explained, They Will Be Difficult to Administer and Control

54. Designing for Calculation

The plan must also be calculable.

A legal provision can describe an economically sophisticated intention while leaving important computational questions unresolved.

For example:

A participant shall share appropriately in value created after admission.

That may express an intention.

It does not provide a calculation.

What is the opening value?

How is subsequent value measured?

How are interim distributions treated?

What happens if value first falls and subsequently recovers?

How are additional investments treated?

A carry plan should therefore ultimately be capable of translation into deterministic economic rules wherever calculation is required.

Economic Intention → Defined Rule → Required Data → Calculation

Without that translation, the plan may produce disputes precisely when the amounts become significant.

55. Designing for Data

Every economic rule creates a data requirement.

If allocations differ by fund, the system must identify the fund.

If they differ by investment, it must identify the investment.

If they change through time, effective dates must be recorded.

If new participants exclude historical value, an opening economic position must be preserved.

If points can be transferred, ownership transactions must be recorded.

Therefore:

Carry Plan Complexity → Data Complexity

A sophisticated plan without the data required to operate it is not a sophisticated solution.

It is an operational risk.

56. Designing for Control

The carry plan should also allow its results to be controlled.

At a minimum, it should be possible to determine:

• whether the relevant pool reconciles;
• whether participant interests reconcile;
• whether allocations follow approved decisions;
• whether effective dates are correct;
• whether reserved interests are treated correctly;
• whether changes are historically traceable;
• and whether distributions reconcile to participant entitlements.

A plan that depends on undocumented manual adjustments can be difficult to verify.

The desired chain is:

Rule → Approval → Cap Table → Calculation → Distribution → Reconciliation

Each step should be traceable.

57. Designing for Disagreement

Carry plans deal with valuable economics.

Disagreement should therefore be expected as a possibility, even in organisations with strong relationships.

A useful design question is:

Could an independent person reconstruct why this participant received this amount?

That requires more than a final percentage.

It requires evidence of:

• the applicable rules;
• the relevant carry pool;
• the approved allocation;
• the effective date;
• subsequent changes;
• the calculation;
• and the resulting distributions.

The stronger that chain, the less dependent the organisation becomes on institutional memory.

58. Carry Plan Design as Economic Architecture

A carry plan should therefore be viewed as more than a compensation schedule.

It is an economic architecture connecting organisational objectives to participant ownership.

The chain can be represented as:

Organisational Objectives

↓

Incentive Philosophy

↓

Allocation Architecture

↓

Carry Pools

↓

Participant Interests

↓

Economic Outcomes

↓

Participant Behaviour

↓

Future Organisational Outcomes

This creates a feedback loop.

The carry plan influences behaviour.

Behaviour influences investment and organisational outcomes.

Those outcomes determine future carry.

Future carry influences the value participants place on the plan.

Carry-plan design is therefore part of the broader economics of the private equity organisation.

59. No Universal Carry Plan

There is no single carry-plan architecture that is correct for every private equity firm.

A small specialist investment team may reasonably use deal-specific economics.

A large diversified manager may prefer broad fund- or strategy-level pools.

A founder-led organisation undergoing succession may deliberately shift allocations between successive fund vintages.

A new firm may allocate carry heavily to founders because they bear substantial entrepreneurial risk.

A mature institution may spread carry across a much broader participant population.

The relevant question is not:

What is the standard carry plan?

It is:

Does the carry plan produce the economic incentives and ownership outcomes the organisation intends?

60. A Carry Plan Should Be Deliberate

Many of the most difficult carry problems arise when economics have developed incrementally.

A first fund has one arrangement.

A new partner joins and receives an exception.

A second fund uses a slightly different structure.

A special deal receives its own allocation.

A new strategy is launched.

Someone leaves.

Points are reallocated.

A spreadsheet is copied.

Another spreadsheet tracks vesting.

A separate file tracks distributions.

Several years later, nobody has a single coherent view of the participant economics.

The underlying lesson is simple:

Carry Architecture Should Be Designed, Not Accumulated Accidentally

Flexibility is necessary.

Uncontrolled complexity is not.

61. The Design Questions

Before selecting the detailed allocation architecture, a private equity organisation should be able to answer a series of fundamental questions.

What is the plan intended to reward?

Historical contribution?

Future contribution?

Investment performance?

Firm building?

Seniority?

Leadership?

Retention?

Some combination?

What behaviour should the plan encourage?

Individual accountability?

Collaboration?

Long-term ownership?

Portfolio-wide responsibility?

Succession?

What is the relevant economic population?

The whole fund?

A vintage?

An investment?

A strategy?

A geography?

Several of these?

How should performance be attributed?

By role?

By individual contribution?

By investment responsibility?

By seniority?

By committee judgement?

How should economics evolve?

With promotions?

Across fund vintages?

When new partners join?

When founders retire?

How much complexity is justified?

Can the structure be calculated?

Can it be administered?

Can it be explained?

Can it be reconstructed?

Can it be controlled?

These questions should precede the detailed cap-table design.

62. The Core Trade-Offs

The principal design tensions developed in this Part can be summarised as:

Historical Contribution ↔ Future Contribution

Individual Performance ↔ Collective Performance

Existing Partner Economics ↔ New Talent

Origination ↔ Subsequent Value Creation

Investment Contribution ↔ Firm Contribution

Equality ↔ Differentiation

Stability ↔ Flexibility

Allocation Certainty ↔ Recognition of Subsequent Contribution

Transparency ↔ Information Complexity

Economic Precision ↔ Administrative Complexity

Granularity ↔ Collaboration

Discretion ↔ Predictability

These are not problems that can necessarily be eliminated.

They are choices that need to be understood.

63. From Design Philosophy to Allocation Architecture

Part II has considered the why of the carry plan.

The next question is where the participant economics are allocated.

Should everyone participate in one fund-wide pool?

Should allocations change between fund vintages?

Should each investment have its own participant cap table?

Should different strategies have separate economics?

Should part of the carry be collective and another part deal-specific?

These choices translate the incentive philosophy into economic architecture.

The progression is:

Carry Plan Objective → Incentive Design → Allocation Architecture → Carry Pools → Cap Tables → Participant Economics

Part III therefore turns from the objectives of the carry plan to its structural implementation:

At what level should participant carry be allocated?

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References and Further Reading

Core References

Stefanova, Mariya (ed.). The Definitive Guide to Carried Interest. Private Equity International, 2017.

Particularly relevant:

• Chapter 14 — Simon Havers, “Carried Interest as an Incentive Mechanism: Advantages and Disadvantages.”
• Chapter 15 — Tom Pittman and Robert Hagmeier, “Carried Interest Employee Incentive Structures.”
• Chapter 16 — Jennifer Choi, “How LPs View the Role of Carry in GP/LP Alignment.”

These chapters provide useful perspectives on carried interest as an incentive mechanism, participant allocation, employee carry structures, performance attribution, retention, transparency and alignment. Private Equity International

Carry as an Incentive Mechanism

Havers, Simon. “Carried Interest as an Incentive Mechanism: Advantages and Disadvantages.” In Mariya Stefanova (ed.), The Definitive Guide to Carried Interest. Private Equity International, 2017.

Relevant subjects include:

• carried interest as a long-term incentive;
• attraction and retention of investment professionals;
• allocation of carry among individuals;
• performance attribution;
• seniority and contribution;
• perceived fairness of allocations;
• individual versus collective incentives;
• deal-specific versus broader participation;
• and behavioural consequences of carry-plan design.

Employee Carry Structures

Pittman, Tom and Robert Hagmeier. “Carried Interest Employee Incentive Structures.” In Mariya Stefanova (ed.), The Definitive Guide to Carried Interest. Private Equity International, 2017.

Relevant subjects include:

• employee carry participation;
• carry points;
• allocation methodologies;
• fund-level allocation;
• vintage-year allocation;
• deal-by-deal allocation;
• participant turnover;
• new hires;
• treatment of existing value when new participants enter;
• forfeiture and reallocation;
• vesting;
• participant communication;
• transparency;
• and administration of carry plans.

GP/LP Alignment

Choi, Jennifer. “How LPs View the Role of Carry in GP/LP Alignment.” In Mariya Stefanova (ed.), The Definitive Guide to Carried Interest. Private Equity International, 2017.

Relevant subjects include:

• carried interest as an alignment mechanism;
• long-term GP incentives;
• relationship between investment performance and GP economics;
• fund governance;
• and the LP perspective on the incentive function of carried interest.

Alignment, Governance and Transparency

Institutional Limited Partners Association. ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners. 2019.

The ILPA Principles identify three central principles for private equity partnerships:

• alignment of interests;
• governance;
• and transparency.

They provide useful wider context for the role of carried interest within the incentive architecture of private equity and for the importance of transparent and appropriately governed economic arrangements. ILPA

Institutional Limited Partners Association. ILPA Private Equity Principles, Version 2.0. 2011.

Relevant subjects include:

• alignment of GP and LP economic interests;
• carried interest as a principal source of GP wealth creation;
• GP capital at risk;
• waterfall structure;
• carry escrow;
• clawback;
• and the relationship between economic structure and alignment. ILPA

Transparency and Reporting

Institutional Limited Partners Association. ILPA Reporting Template, Version 2.0. 2025.

The Reporting Template provides broader industry context for transparency around fees, expenses and carried interest and reflects increasing expectations for structured and consistent reporting of private equity economics. ILPA

Institutional Limited Partners Association. 2016 ILPA Reporting Template Guidance. 2016.

Relevant subjects include:

• carried-interest reporting;
• standardisation of economic information;
• transparency;
• consistent definitions;
• and the importance of structured data for private equity reporting. ILPA

Carry Allocation and Organisational Design

Havers, Simon. “Carried Interest as an Incentive Mechanism: Advantages and Disadvantages.” In Mariya Stefanova (ed.), The Definitive Guide to Carried Interest. Private Equity International, 2017.

Particularly relevant to:

• Historical Contribution ↔ Future Contribution
• Individual Performance ↔ Collective Performance
• seniority;
• performance attribution;
• recruitment;
• retention;
• carry as recognition;
• and the behavioural effects of different allocation structures.

Pittman, Tom and Robert Hagmeier. “Carried Interest Employee Incentive Structures.” In Mariya Stefanova (ed.), The Definitive Guide to Carried Interest. Private Equity International, 2017.

Particularly relevant to:

• Existing Partner Economics ↔ New Talent
• fund-level versus granular allocation;
• new joiners;
• participant turnover;
• reserved interests;
• reallocations;
• vesting;
• transparency;
• and the administrative consequences of increasingly granular carry structures.

Internal Economics of Private Equity Partnerships

Buchner, Axel, David T. Robinson and Berk A. Sensoy. “Pay Now or Pay Later? The Economics within the Private Equity Partnership.” Journal of Financial Economics, Vol. 134, No. 2, 2019, pp. 391–415.

Relevant subjects include:

• allocation of carried interest between individual partners;
• senior versus junior partner economics;
• differences in carry allocations within private equity partnerships;
• management-company ownership versus carried-interest ownership;
• partner departures;
• retention;
• partnership growth;
• and the organisational consequences of internal economic allocation.

Long-Term Incentives and Future Fund Economics

Chung, Ji-Woong, Berk A. Sensoy, Lea H. Stern and Michael S. Weisbach. “Pay for Performance from Future Fund Flows: The Case of Private Equity.” Review of Financial Studies, Vol. 25, No. 11, 2012, pp. 3259–3304.

Relevant subjects include:

• long-term performance incentives;
• carried interest;
• future fund economics;
• performance and subsequent fundraising;
• current compensation versus future economic opportunity;
• reputational incentives;
• and successive fund generations.

Particularly relevant to:

Current Carry Ownership ≠ Expected Future Carry Opportunity

Compensation, Ownership and Performance

Robinson, David T. and Berk A. Sensoy. “Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance.” Review of Financial Studies, Vol. 26, No. 11, 2013, pp. 2760–2797.

Relevant subjects include:

• GP compensation;
• carried interest;
• managerial ownership;
• performance incentives;
• GP/LP alignment;
• fund performance;
• and the relationship between compensation structures and private equity economics.

Compensation Architecture and Behaviour

Hüther, Niklas, David T. Robinson, Sönke Sievers and Thomas Hartmann-Wendels. “Paying for Performance in Private Equity: Evidence from Venture Capital Partnerships.” Management Science, Vol. 66, No. 4, 2020, pp. 1756–1782.

Relevant subjects include:

• performance-based compensation;
• carried interest;
• compensation design;
• timing of carry;
• investment incentives;
• exit decisions;
• and behavioural consequences of compensation structures.

Particularly relevant to:

Carry Allocation Architecture → Economic Incentives → Potential Behaviour

Economic Value of Carried Interest

Choi, Wonho Wilson, Andrew Metrick and Ayako Yasuda. “A Model of Private Equity Fund Compensation.” NBER Working Paper No. 17568, 2011.

Relevant subjects include:

• carried-interest economics;
• management fees;
• GP compensation;
• expected value of carried interest;
• compensation architecture;
• timing of carry;
• and the relationship between contractual carry terms and economic value.

Particularly relevant to:

Headline Carry Percentage ≠ Economic Value of Carry

Scale and Economic Importance of Carried Interest

Phalippou, Ludovic. “The Trillion Dollar Bonus of Private Capital Fund Managers.” Management Science, 2026.

Relevant subjects include:

• aggregate carried-interest economics;
• performance-based compensation;
• private capital manager remuneration;
• scale of GP economic participation;
• and the economic significance of carried interest across private capital funds.

Carry Allocation and Compensation Market Practice

Private Equity Professional. 2025 Carried Interest and Compensation Survey. 2025.

Relevant subjects include:

• carried-interest allocations by professional seniority;
• partner economics;
• junior investment-professional economics;
• salary, bonus and carry;
• compensation by fund size;
• and contemporary private equity compensation practices.

Alignment, Governance and Transparency

Institutional Limited Partners Association. ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners. 2019.

Relevant subjects include:

• alignment of interests;
• governance;
• transparency;
• carried-interest economics;
• GP incentives;
• and long-term alignment between the manager and investors.

Institutional Limited Partners Association. ILPA Private Equity Principles, Version 2.0. 2011.

Relevant subjects include:

• alignment of GP and LP interests;
• carried interest;
• GP commitment;
• waterfall structures;
• clawback;
• escrow;
• and the role of economic incentives in private equity fund structures.

Practitioner Framework Used in This Part

The following formulations are used in The Carried Interest Bible as an analytical framework for carry-plan design:

Economic Allocation + Incentive Mechanism + Retention Mechanism + Recognition System + Succession Mechanism

Long-Term Value Creation → Long-Term Participant Reward

Salary → Compensation for Current Role

Bonus → Reward for Shorter-Term Performance

Carry → Participation in Long-Term Investment Economics

Carry Allocation Architecture → Participant Economic Exposure → Participant Incentives

Historical Contribution ↔ Future Contribution

Individual Performance ↔ Collective Performance

Existing Partner Economics ↔ New Talent

Origination ↔ Subsequent Value Creation

Investment Contribution ↔ Firm Contribution

Equality ↔ Differentiation

Stability ↔ Flexibility

Allocation Certainty ↔ Recognition of Subsequent Contribution

Economic Precision ↔ Administrative Complexity

Granularity ↔ Collaboration

Discretion ↔ Predictability

Carry Points → Economic Percentage → Carry Pool → Indicative Economic Value

Current Carry Value ≠ Final Carry Value

Ownership of the Management Company ≠ Ownership of Carry

Current Carry Ownership ≠ Expected Future Carry Opportunity

Carry Plan Rule → Allocation Decision → Cap Table Transaction

Carry Plan Complexity → Data Complexity

Rule → Approval → Cap Table → Calculation → Distribution → Reconciliation

Carry Architecture Should Be Designed, Not Accumulated Accidentally

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