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

First published: 24th of September 2026

Latest update: 5th of October 2026

Status: First Draft

Part III — Carry Allocation Architecture

1. From Plan Design to Allocation Architecture

Part II considered what a carry plan is intended to achieve.

The next question is structural:

At what level should participant carry be allocated?

The fund waterfall determines how much carried interest is generated between the investors and the GP or other carry recipient.

The participant carry architecture determines how that carry is divided within the GP-side economic structure.

These are different layers.

Fund Waterfall Architecture ≠ Participant Carry Allocation Architecture

A fund may operate a whole-fund waterfall between the LPs and GP while the GP internally allocates its carry separately by investment.

Conversely, a fund may generate carry through several economic streams while the participant plan ultimately combines those economics into a broader participant pool.

The participant allocation architecture therefore requires its own definition.

2. The Allocation Population

Every participant carry percentage requires an economic population to which it applies.

A statement such as:

Partner A has 20% carry.

is incomplete.

The relevant question is:

20% of what?

The 20% could apply to:

• all carry generated by a fund;
• a particular fund vintage;
• carry generated by a particular investment;
• a particular investment strategy;
• a geographical portfolio;
• a particular team;
• a defined portion of the GP's carry;
• or another specified economic population.

The starting point for allocation architecture is therefore:

Define the Economic Population → Define the Carry Pool → Allocate Participant Interests

Without the first step, the participant percentage has no complete economic meaning.

3. The Principal Allocation Architectures

Three basic allocation architectures provide a useful starting point:

1. Fund-Level Allocation
2. Vintage-Level Allocation
3. Investment-Level Allocation

These approaches have long been recognised in participant carry-plan design. IMG_8210.HEIC

In practice, additional structures are possible, including:

• strategy-level allocation;
• geography-level allocation;
• team-level allocation;
• transaction-specific special pools;
• firm-wide pools;
• and hybrid structures combining several allocation levels.

The architecture can therefore be represented more generally as:

Carry Generated → Defined Allocation Population → Carry Pool → Participant Cap Table

Fund-Level Allocation

4. Fund-Level Carry Allocation

Under a fund-level allocation structure, participant interests apply to the relevant carry generated by the fund as a whole.

Suppose Fund I generates €30 million of carry.

The participant cap table is:

The resulting participant allocations are:

The basic calculation is:

Participant Carry = Fund Carry Pool × Participant Fund-Level Interest

This is the simplest allocation architecture.

5. Economic Meaning of Fund-Level Allocation

Under a fund-level architecture, the participant generally participates economically in the collective outcome of the relevant fund carry pool.

The participant's economics do not necessarily depend upon which individual investments generated the carry.

Suppose Fund I contains four investments:

If Partner A owns 30% of the fund-level participant pool:

Partner A Carry = €30m × 30% = €9m

It is unnecessary for participant allocation purposes to determine whether Partner A originated Investment A, managed Investment C or had any direct involvement in Investment D.

The participant economics operate at fund level.

This produces:

Fund Performance → Fund Carry Pool → Participant Allocation

6. Collective Economics

A fund-level architecture creates collective exposure.

If one investment performs exceptionally well, all participants in the relevant fund-level pool benefit according to their percentages.

If another investment performs badly and reduces fund carry, all participants are economically affected.

The participant therefore has an incentive connected to the performance of the broader fund rather than only selected investments.

Conceptually:

Portfolio Success → Shared Participant Economics

This can encourage collaboration.

Participants may have an economic reason to assist investments outside their immediate responsibility because improvements anywhere in the relevant fund can increase the carry pool in which they participate.

7. Advantages of Fund-Level Allocation

Fund-level allocation can offer several advantages.

Simplicity

There may be one principal participant cap table for the relevant fund.

Collaboration

Participants share exposure to the broader investment portfolio.

Reduced Attribution Requirement

The firm does not need to determine precisely which individual created which portion of each investment's return.

Administrative Efficiency

Participant economics can often be calculated directly from the fund-level carry pool.

Portfolio Perspective

Participants are economically exposed to successful and unsuccessful investments across the fund.

The architecture therefore naturally supports:

Collective Fund Performance → Collective Carry Pool

8. Limitations of Fund-Level Allocation

The same architecture can create disadvantages.

Participants who create exceptional investment performance may receive no additional economics from that performance beyond their general fund percentage.

Individuals with relatively limited contribution can participate in the same pool.

Different levels of contribution may therefore become disconnected from economic reward.

This creates the potential tension:

Collective Alignment ↔ Individual Attribution

A fund-level structure can address some of this through differentiated participant percentages.

But once the percentage is established, the participant generally shares in the relevant fund economics according to that percentage.

9. Fund-Level Allocation Does Not Require Equal Allocation

Fund-level allocation should not be confused with equal allocation.

Consider:

The architecture is still fund-level.

The participants simply have different percentages.

Therefore:

Fund-Level Allocation ≠ Equal Allocation

The allocation level determines the economic population.

The cap table determines how ownership of that population is divided.

These are separate decisions.

Vintage-Level Allocation

10. What Is a Vintage-Level Carry Allocation?

A private equity organisation commonly manages several funds simultaneously.

The participant population may change between those funds.

A vintage-level architecture allows participant interests to differ between successive fund generations.

For example:

Each fund has its own carry pool and participant ownership.

The architecture becomes:

Fund I Carry → Fund I Cap Table

Fund II Carry → Fund II Cap Table

Fund III Carry → Fund III Cap Table

This allows participant economics to evolve without necessarily changing historical ownership in earlier funds.

11. Vintage-Level Allocation and Succession

Vintage-level allocation can be particularly useful for succession.

Suppose Founder A gradually reduces active involvement while Partner D assumes increasing responsibility.

Rather than reallocating historical Fund I economics, the firm can change the economics of successive funds.

For example:

Founder A:

Fund I: 40% → Fund II: 30% → Fund III: 20%

Partner D:

Fund I: 5% → Fund II: 15% → Fund III: 25%

The transition occurs through future economic populations.

This creates:

Historical Economics Remain Historical

while:

Future Responsibility → Greater Future Economics

That can substantially simplify succession.

12. Vintage-Level Allocation and New Joiners

The same architecture can accommodate new joiners.

Suppose Partner E joins while Fund II is already substantially invested.

The firm may decide:

Fund I: 0%

Fund II: 0%

Fund III: 15%

Partner E therefore participates economically only from the next fund generation.

This avoids the need to determine how much value had already been created in Funds I and II when Partner E joined.

The architecture is simple:

Join Date → Future Fund Participation

But this may not always provide sufficient incentive.

If Fund III will not be raised for several years, the new partner may have no meaningful carry exposure during the intervening period.

The firm may therefore choose a different architecture or combine vintage-level participation with another pool.

13. Vintage Is an Economic Definition

The word vintage requires care.

In market usage, fund vintage often refers to the year in which a fund begins investing or has its first closing.

In a participant carry plan, a vintage allocation may instead refer more generally to a defined generation of participant economics.

The relevant economic population should therefore be defined explicitly.

For participant carry purposes:

Label ≠ Economic Definition

The plan should determine exactly which fund, vehicle, investments or economics belong to each participant allocation population.

Investment-Level Allocation

14. Investment-Level Carry Allocation

Under an investment-level architecture, participant interests can differ between individual portfolio investments.

For example:

Each investment effectively has its own participant cap table.

If the investments generate:

the participant calculations must be performed separately.

Partner A:

€8m × 50% + €7m × 20% + €5m × 30% = €6.9m

Partner B:

€8m × 30% + €7m × 50% + €5m × 20% = €6.9m

Principal C:

€8m × 20% + €7m × 30% + €5m × 50% = €6.2m

Total:

€6.9m + €6.9m + €6.2m = €20m

The participant allocation architecture therefore preserves the investment populations.

15. Why Investment-Level Allocation Exists

Investment-level allocation can create a closer connection between contribution and reward.

Suppose Partner A originates and leads Investment A.

Partner B originates and leads Investment B.

Partner C contributes most strongly to Investment C.

A fund-level allocation could give all three identical percentages.

An investment-level architecture can instead differentiate their economic exposure.

Conceptually:

Investment Contribution → Investment Carry Participation

This can strengthen individual accountability and allow the carry plan to recognise differences in investment contribution.

16. Investment-Level Allocation Does Not Require Deal-by-Deal Fund Carry

An important distinction is necessary.

The participant allocation may operate by investment even when the underlying LP/GP waterfall does not.

Suppose the fund has a European-style whole-fund waterfall.

At LP/GP level:

Aggregate Fund Economics → Whole-Fund Waterfall → GP Carry

Internally, however, the GP may attribute its resulting carry across investments and then apply separate participant percentages.

Therefore:

Whole-Fund LP Waterfall + Investment-Level Participant Allocation

is entirely conceptually possible.

This illustrates again:

Fund Waterfall Architecture ≠ Participant Carry Allocation Architecture

The two questions should always be analysed separately.

17. Attributing Fund Carry to Investments

Investment-level participant allocation creates an additional requirement.

If the underlying waterfall calculates carry only at fund level, how is the resulting carry attributed to individual investments?

This is not necessarily trivial.

Suppose:

Total fund carry = €20 million.

The participant plan requires investment-level allocation.

The system needs a method for determining how much of the €20 million belongs economically to:

Investment A

Investment B

Investment C

That attribution method becomes part of the participant carry architecture.

Possible methodologies may depend on:

The important principle is:

Fund-Level Carry Exists ≠ Investment-Level Carry Attribution Is Automatically Known

If investment-level participant percentages are to be applied, the relevant investment-level carry populations must first be determined.

18. Attribution Must Reconcile

Suppose the fund waterfall produces €20 million of carry.

The internal attribution determines:

Investment A: €8 million

Investment B: €7 million

Investment C: €5 million

Then:

€8m + €7m + €5m = €20m

The investment-level attribution should reconcile to the relevant fund-level carry population.

Conceptually:

Σ Investment Carry Attribution = Relevant Fund Carry Pool

This is an important control.

But again:

Reconciliation ≠ Proof of Correct Attribution

A methodology can allocate exactly €20 million while allocating it incorrectly between investments.

The economic methodology itself must therefore be defined and defensible.

19. Loss-Making Investments

Investment-level participant allocation becomes particularly interesting when some investments lose money.

Suppose:

At fund level, Investment C reduces overall fund performance.

If participant carry is allocated by investment, the plan must determine how the loss associated with C affects participants.

Does it reduce:

This is not merely an arithmetic question.

It is an architectural question.

Investment-Level Upside Allocation Requires Defined Treatment of Investment-Level Downside

Without a defined downside mechanism, deal-specific economics can become asymmetrical.

20. Positive Attribution Without Negative Attribution

Suppose Partner A receives a large share of carry from investments they lead successfully.

But when one of Partner A's investments performs badly, the loss is absorbed collectively by the fund-level participant pool.

The economic architecture then becomes:

Individualised Upside + Socialised Downside

That may be intentional.

But if it is not intentional, the carry plan may create distorted incentives.

A more symmetrical architecture might seek:

Individualised Upside + Corresponding Downside Exposure

The exact implementation depends upon the carry plan.

The important point is that investment-level allocation should consider both sides of the economic distribution.

21. Cross-Subsidisation

Fund-level allocation naturally creates cross-subsidisation between investments from the perspective of individual participant economics.

Strong investments support the aggregate carry pool.

Weak investments reduce it.

Investment-level allocation can reduce that cross-subsidisation by associating participant economics more directly with particular investments.

Neither result is inherently wrong.

The relevant design question is:

Should participants share the collective portfolio outcome, or should their economics follow more closely the investments for which they are responsible?

This is a fundamental architectural choice.

22. Investment-Level Allocation and Collaboration

As discussed in Part II, investment-level economics can strengthen individual accountability.

But they can also affect collaboration.

If Partner A has substantial economics in Investment A and none in Investment B, Partner A may have a stronger direct financial incentive to devote time to Investment A.

Therefore:

More Granular Economic Attribution → Stronger Direct Attribution

but potentially:

More Granular Economic Attribution → Weaker Collective Economic Exposure

A firm can attempt to balance these effects through hybrid structures.

Strategy-Level Allocation

23. Strategy-Level Carry Pools

A multi-strategy manager may maintain separate participant economics for different investment strategies.

For example:

A participant might own:

20% of Buyout carry

5% of Growth carry

0% of Infrastructure carry

The allocation architecture becomes:

Fund Economics → Strategy Carry Pool → Strategy Participant Cap Table

This can be useful where investment teams are substantially different between strategies.

24. Shared Participants Across Strategies

Some professionals may contribute across several strategies.

For example:

There is again no meaningful single answer to:

“What is Partner B's carry percentage?”

Partner B owns several economic interests.

Therefore:

Participant Carry = Σ Carry Pool × Participant Interest in That Pool

The cap table must preserve each economic population separately.

25. Strategy-Level Economics and Firm Building

Strategy-level carry can align investment teams closely with the economics they generate.

But it may create challenges for people contributing across the organisation.

A chief investment officer, fundraising partner, operating specialist or senior executive may contribute to several strategies.

A purely strategy-specific architecture may therefore under-recognise firm-wide contribution.

One possible solution is a combination of:

Firm-Wide Pool + Strategy Pool

For example:

70% of participant economics allocated by strategy;

30% allocated through a broader firm pool.

This creates a hybrid architecture.

Geography-Level Allocation

26. Geographic Carry Pools

International private equity organisations may also distinguish economics geographically.

For example:

Europe

North America

Asia

A participant may have primary economics in one geography while retaining some participation in a broader global pool.

Conceptually:

Regional Performance → Regional Carry Pool

plus potentially:

Global Performance → Global Carry Pool

Again, the architecture should reflect the intended incentives.

A fully regional structure may strengthen local accountability.

A global structure may encourage cooperation across offices.

27. Geography Is Not Necessarily Legal Structure

The geographic carry population need not correspond to a separate legal fund.

A single fund could invest globally while the internal participant plan distinguishes between regional teams.

Conversely, several legal vehicles might support one regional economic pool.

Therefore:

Legal Vehicle ≠ Necessarily Participant Allocation Population

The carry-plan economics determine the relevant population.

Team-Level and Functional Pools

28. Team-Level Carry Pools

A manager may establish pools for particular teams.

For example:

This can provide targeted incentives.

But the economic boundary must be clearly defined.

If an operating team participates in a portfolio-company-specific pool, the plan must determine which investment economics feed that pool.

If the operating team participates in a fund-wide pool, the economics are broader.

The label “operating partner carry” is therefore insufficient without defining the underlying population.

29. Functional Participation

Some carry plans may allocate a defined portion of economics to non-investment functions.

For example:

Total participant pool: 100 points

Investment professionals: 75 points

Operating professionals: 10 points

Firm leadership / other functions: 10 points

Reserved: 5 points

This remains a single pool if all points participate proportionately in the same underlying carry.

Alternatively, each category could have a separate pool with different economics.

The distinction is:

Different Participant Categories ≠ Necessarily Different Carry Pools

Separate pools exist only when the underlying economic populations or allocation rules differ.

Hybrid Allocation Architecture

30. Why Hybrid Structures Arise

No single allocation level necessarily achieves every objective identified in Part II.

Fund-level allocation encourages collective alignment.

Investment-level allocation can strengthen individual attribution.

Strategy-level allocation can align specialist teams.

Firm-wide economics can reward broader organisational contribution.

A hybrid structure can combine these objectives.

For example:

Participant Carry = Fund-Wide Component + Strategy Component + Deal-Specific Component

This allows the organisation to create several simultaneous incentives.

31. A Simple Hybrid Example

Suppose €20 million of carry is available for participant allocation.

The carry plan provides:

60% to a fund-wide pool

25% to investment-specific pools

15% to a firm-building pool

Therefore:

Fund-Wide Pool = €20m × 60% = €12m

Investment-Specific Pools = €20m × 25% = €5m

Firm-Building Pool = €20m × 15% = €3m

Partner A owns:

20% of the fund-wide pool;

40% of the relevant investment-specific economics;

10% of the firm-building pool.

Assume Partner A's investment-specific population receives €2 million of the €5 million deal pool.

Partner A receives:

Fund-wide:

€12m × 20% = €2.4m

Investment-specific:

€2m × 40% = €0.8m

Firm-building:

€3m × 10% = €0.3m

Total:

€2.4m + €0.8m + €0.3m = €3.5m

Partner A therefore has no single underlying carry percentage.

The €3.5 million is the sum of several economic interests.

32. Effective Percentage in a Hybrid Structure

Partner A receives €3.5 million from total participant carry of €20 million.

The effective aggregate percentage is:

€3.5m / €20m = 17.5%

But Partner A does not necessarily own a contractual 17.5% interest.

The 17.5% is an output of the current economic composition.

If the relative amounts generated by the different pools change, Partner A's effective percentage can change.

Therefore:

Effective Aggregate Percentage ≠ Underlying Carry Ownership

This distinction becomes increasingly important as allocation architecture becomes more granular.

33. Layered Carry Interests

A participant can therefore have several layers of carry simultaneously.

For example:

These percentages should not be added.

They have different denominators.

5% + 15% + 20% + 30% + 10% ≠ 80% Carry

Each percentage applies to a separate economic population.

This illustrates again:

A percentage without its denominator is not a complete economic description.

34. Carry Pools as Economic Containers

It is useful to think of each carry pool as an economic container.

The container defines:

1. which carry enters it;
2. which participants own it;
3. in what proportions;
4. during which periods;
5. and under which rules.

Conceptually:

Carry Source → Carry Pool → Participant Ownership

A participant cap table should therefore always belong to a defined carry pool.

There is no meaningful cap table in the abstract.

35. One Carry Source Can Feed Multiple Pools

A single fund-level carry amount may be divided between several participant pools.

Suppose:

Fund carry generated: €40m

The GP arrangements provide:

Founder/Sponsor Pool: 25%

Employee Fund-Wide Pool: 50%

Deal-Specific Pool: 20%

Reserved Strategic Pool: 5%

Then:

The fund generates one carry amount.

The participant architecture divides it into several economic populations.

Therefore:

One Carry Source → Multiple Carry Pools

36. Multiple Carry Sources Can Feed One Pool

The reverse can also be possible.

Suppose a senior leadership pool participates in carry from several funds or strategies.

The pool might receive:

Fund A allocation: €4m

Fund B allocation: €3m

Growth Strategy allocation: €2m

Total leadership pool:

€4m + €3m + €2m = €9m

Participants then share the €9 million according to the leadership-pool cap table.

Therefore:

Multiple Carry Sources → One Participant Pool

Where this occurs, the rules governing aggregation must be explicit.

37. Aggregation Is an Economic Rule

Aggregation should never be treated merely as a technical convenience.

If different carry sources have different participant populations, combining them before participant allocation can produce incorrect results.

Suppose:

Pool A carry = €10m

Partner X interest = 50%

Pool B carry = €30m

Partner X interest = 10%

Correct allocation:

€10m × 50% + €30m × 10% = €8m

Partner X's effective interest in the combined €40 million is:

€8m / €40m = 20%

If the relative size of the pools changes, that effective percentage changes.

Therefore the 20% should not automatically become a contractual participant percentage.

The general rule is:

Calculate at the Required Economic Population → Then Aggregate

38. The Non-Linearity Problem

Where participant allocation itself is purely proportional, the participant-level calculation may be mathematically linear within a defined pool.

But the carry feeding that pool may have been produced by a non-linear fund waterfall.

Therefore care is required when attempting to attribute or aggregate carry across investments or other populations.

For example:

Waterfall(A + B) ≠ Necessarily Waterfall(A) + Waterfall(B)

The participant plan cannot assume that investment-level carry exists simply because investment-level gains exist.

The underlying waterfall architecture must first be respected.

This is particularly important where the participant architecture is more granular than the fund waterfall.

39. Fund Carry Attribution Is Not Fund Waterfall Recalculation

Suppose a whole-fund waterfall produces €20 million of carry.

The participant plan then attributes that carry between investments.

That attribution should not automatically be described as calculating a separate fund waterfall for each investment.

Those are different concepts.

Fund Waterfall Calculation → €20m Carry

then:

Internal Attribution Method → Investment Carry Populations

The second process allocates an already determined economic amount for participant purposes.

It does not necessarily change the contractual LP/GP waterfall.

This distinction should remain explicit.

40. Allocation Architecture and Historical Value

Allocation architecture also affects the treatment of historical value.

Suppose a new partner joins Fund III halfway through the investment period.

Under a fund-level architecture, determining whether the partner participates in existing value may require an opening-value mechanism or another rule.

Under an investment-level architecture, the plan could instead provide:

Existing investments: no participation

Future investments: participation

This may simplify the economic boundary.

Therefore:

Allocation Architecture Can Determine How Historical and Future Value Are Separated

This becomes particularly relevant to new joiners and promotions.

Part VII develops this issue further.

41. Allocation Architecture and Promotions

Suppose Principal A is promoted to partner halfway through a fund.

Under a fund-level structure, the organisation might increase the participant's fund percentage.

It must then determine whether that increase applies:

• retrospectively;
• prospectively;
• only to future value;
• or from another defined date.

Under an investment-level architecture, the participant might retain existing deal percentages while receiving larger percentages in investments made after promotion.

Different architectures therefore produce different mechanisms for recognising career progression.

42. Allocation Architecture and Departures

Departures create similar issues.

Under a fund-level architecture, a departing participant may retain or forfeit some portion of their fund-level interest.

Under an investment-level architecture, treatment could potentially differ between investments.

For example:

• realised investments;
• existing unrealised investments;
• future investments;
• investments for which the participant had direct responsibility.

The more granular the architecture, the more granular the departure rules may potentially become.

Therefore:

Allocation Granularity → Potential Leaver Complexity

Detailed leaver treatment belongs to Chapter 7, but the architecture selected in Chapter 6 determines the populations to which those rules must eventually be applied.

43. Allocation Architecture and Clawback

Participant clawback responsibility may also depend on allocation architecture.

If all participants share one fund-level pool, allocating a fund-level clawback may be relatively straightforward, subject to historical ownership and other participant rules.

If carry has been allocated across many investment-specific pools, the historical participant populations may differ substantially.

The system may then need to know:

• which carry was distributed;
• from which pool;
• to which participant;
• under which ownership percentage;
• at which date.

Therefore:

More Granular Allocation → More Granular Historical Responsibility

This reinforces the need for transaction-based historical records.

44. Allocation Architecture and Data

Each additional allocation dimension creates additional data requirements.

A fund-level architecture may require:

Participant + Fund + Percentage + Effective Date

A vintage architecture may require:

Participant + Fund/Vintage + Percentage + Effective Date

An investment-level architecture may require:

Participant + Fund + Investment + Percentage + Effective Date

A hybrid structure may require:

Participant + Fund + Strategy + Investment + Pool + Class + Percentage + Effective Date

The architecture therefore determines the dimensionality of the carry data model.

Allocation Complexity → Data Dimensionality

This is not merely an IT consideration.

If the required dimensions are not captured, the economics cannot reliably be reconstructed.

45. Allocation Architecture and Number of Cap Tables

A fund-level structure might require one principal participant cap table per fund.

An investment-level structure could require one cap table for every investment.

A hybrid structure may require both.

Consider a manager with:

10 active funds

20 investments per fund

3 strategy pools

2 additional firm-wide pools

A highly granular architecture could create hundreds of distinct economic populations.

The arithmetic remains simple.

The administration does not.

This illustrates:

Simple Formula × Many Economic Populations = Complex Administration

46. Economic Precision Versus Operational Burden

Greater granularity can create a closer connection between economic contribution and participant reward.

But every additional pool may require:

• participant ownership records;
• effective dates;
• approval records;
• vesting records;
• valuation information;
• distribution allocations;
• tax information;
• clawback history;
• reconciliations;
• and participant reporting.

Therefore:

Economic Granularity → Administrative Burden

The optimal architecture is not necessarily the most granular architecture possible.

It is the architecture that achieves the desired incentive outcome while remaining operationally sustainable.

47. The Spreadsheet Problem

A simple fund-level cap table may be manageable in a spreadsheet.

As the architecture develops into multiple vintages, investments, participant classes and effective periods, spreadsheet administration becomes increasingly difficult.

Historical practitioner material on employee carry structures has specifically identified the operational burden created as firms move from relatively simple carry allocations towards multiple sets of points, participant movements and increasingly detailed reporting. IMG_8217.HEIC

The problem is not that spreadsheets cannot perform the arithmetic.

The problem is maintaining:

Population + Ownership + Time + History + Reconciliation

across a growing number of economic interests.

48. Architecture Should Precede Technology

Technology should support the carry architecture.

It should not determine it.

The correct sequence is:

Economic Objective → Allocation Architecture → Carry Pools → Data Requirements → Calculation Requirements → Technology

not:

Available Spreadsheet or Software → Carry Architecture

Designing economics around the limitations of an existing system can create unnecessary compromises.

Conversely, creating an architecture that cannot realistically be administered creates operational risk.

The design and technology therefore need to meet in the middle.

49. Allocation Architecture and Legal Structure

The economic carry pool may be implemented through one or more legal entities.

But the legal structure should not be assumed to define the participant economic population automatically.

For example:

Fund → GP → Carry Partnership → Participants

The carry partnership might contain one participant pool.

Alternatively, separate classes or vehicles might represent different economic pools.

Conversely, one economic pool might be implemented across several legal vehicles.

Therefore:

Legal Structure ≠ Necessarily Economic Allocation Architecture

The economic architecture should be understood first.

The legal structure then needs to implement it correctly.

50. Allocation Architecture and Tax

Different allocation architectures can also have tax consequences.

For example, the timing of grants, the legal nature of interests, jurisdiction, vesting, transfers and participation in existing value may all affect tax treatment.

Those issues are addressed primarily in Chapter 8.

For the purposes of Chapter 6, the important point is:

Economic Design Cannot Be Considered Entirely in Isolation from Tax Implementation

A theoretically attractive allocation architecture may require modification when translated into actual legal and tax structures.

51. Allocation Architecture and Accounting

Participant carry architecture can also affect accounting and reporting.

Different organisations may need to account for:

• carry interests;
• employee compensation;
• liabilities;
• distributions;
• accruals;
• or other balances

depending on the relevant accounting framework and legal structure.

Detailed accounting treatment belongs to Chapter 10.

The Chapter 6 principle remains:

Economic Allocation ≠ Accounting Treatment

The economic architecture should be understood independently before mapping it into accounting.

52. Allocation Architecture and Participant Reporting

Participant reporting should follow the underlying economic architecture.

If a participant owns interests in:

• Fund II;
• Fund III;
• Growth Strategy;
• Investment X;
• and a firm-wide leadership pool,

a single headline carry percentage is unlikely to be useful.

A participant statement may instead need to show each economic population separately.

For example:

This is economically more informative than stating:

Participant carry value: €7.5 million.

The total is useful.

The underlying populations explain it.

53. Choosing the Allocation Architecture

There is no universal allocation architecture.

The appropriate structure depends on what the carry plan is intended to achieve.

A firm seeking strong collective alignment may favour broader fund-level economics.

A firm seeking detailed performance attribution may favour investment-level economics.

A multi-strategy manager may require strategy pools.

A firm undergoing succession may use successive fund vintages to shift economics gradually.

A firm seeking several objectives simultaneously may use a hybrid structure.

The decision can therefore be framed as:

Desired Incentive → Appropriate Economic Population → Allocation Architecture

54. Questions for Fund-Level Allocation

A fund-level structure should consider:

• Who participates in the fund pool?
• Does the same percentage apply to all fund carry?
• Are any investments excluded?
• Are any carry streams excluded?
• Is there a reserved pool?
• How do new joiners enter?
• How are promotions handled?
• Does ownership change prospectively or retrospectively?
• How does the structure operate across successor funds?

These questions determine whether the apparent simplicity of the fund-level structure remains economically clear through time.

55. Questions for Vintage-Level Allocation

A vintage structure should consider:

• What defines the vintage?
• Which legal funds belong to it?
• Are parallel funds included?
• When does participation begin?
• Can participants have different percentages across vintages?
• How are overlapping funds treated?
• How are promotions reflected?
• How are new partners introduced?
• How does succession occur?
• Can historical vintage interests change?

The term vintage should never substitute for a precise economic definition.

56. Questions for Investment-Level Allocation

An investment-level structure should consider:

• What defines an investment?
• How is carry attributed to that investment?
• How are follow-on investments treated?
• How are partial exits treated?
• How are losses treated?
• How are shared costs allocated?
• How are cross-investment waterfall effects handled?
• When are participant percentages established?
• Can percentages change during the holding period?
• How are later contributors recognised?
• How are new joiners treated?
• How are departures treated?
• How does investment carry reconcile to fund carry?

Without answers to these questions, “deal-by-deal employee carry” may describe an intention rather than a complete economic methodology.

57. Questions for Strategy and Hybrid Structures

A strategy or hybrid architecture should additionally consider:

• Which carry belongs to each strategy?
• Can investments move between strategies?
• Which participants participate in multiple pools?
• How are firm-wide contributors treated?
• Is any carry allocated twice?
• Is any carry omitted?
• How do the component pools reconcile to total carry?
• Are effective dates consistent?
• How are participant statements consolidated?
• How are cross-pool transfers handled?

The more layers the architecture contains, the more important reconciliation becomes.

58. Avoiding Double Allocation

Hybrid structures create a particular risk: the same carry may accidentally be allocated more than once.

Suppose €20 million of carry exists.

If €12 million is allocated to a fund-wide pool and €8 million to deal pools:

€12m + €8m = €20m

The architecture reconciles.

But if the deal pools are calculated as €8 million in addition to participant percentages already applied to the entire €20 million fund pool, the same economics may be duplicated.

Therefore:

Every Unit of Carry Should Have a Defined Allocation Destination

A useful control is:

Total Carry Source = Sum of Carry Allocated Across Pools + Properly Classified Unallocated Carry

59. Avoiding Omitted Carry

The opposite error is also possible.

Suppose:

Fund carry: €20m

Fund-wide pool: €10m

Deal pools: €6m

Leadership pool: €2m

Only €18 million has been classified.

The remaining €2 million requires explanation.

It might belong to:

• the sponsor;
• a reserve;
• another participant pool;
• or an intentionally unallocated balance.

But it should not disappear.

Therefore:

Unallocated ≠ Unexplained

Every portion of the carry should have a defined economic status.

60. The Allocation Map

For complex structures, it can be useful to create an allocation map before constructing the participant cap tables.

For example:

Fund Carry: €40m

↓

Sponsor Pool: €10m

Employee Pool: €24m

Strategic Pool: €4m

Reserve: €2m

The employee pool might then divide further:

Employee Pool: €24m

↓

Fund-Wide Pool: €14m

Investment Pools: €7m

Leadership Pool: €3m

Each of those pools then has its own participant cap table.

This produces a traceable hierarchy:

Carry Source → Pool → Sub-Pool → Participant

Such a map can make a complex carry plan considerably easier to understand.

61. Allocation Trees

The same concept can be expressed as an allocation tree.

At each node, the economics are divided according to a defined rule.

For example:

€40m Fund Carry

→ 25% Sponsor

→ 60% Employee

→ 10% Strategic

→ 5% Reserve

The €24 million employee branch then divides:

→ 60% Fund-Wide

→ 30% Investment-Specific

→ 10% Leadership

The participant percentages operate only after the correct branch has been identified.

This provides a useful conceptual rule:

Identify the Pool Before Applying the Participant Percentage

62. Allocation Architecture as a Data Hierarchy

The allocation tree also suggests a natural data hierarchy:

Fund

↓

Carry Source

↓

Carry Plan

↓

Carry Pool

↓

Sub-Pool

↓

Participant Interest

↓

Participant Allocation

This hierarchy can support both calculation and reconciliation.

It also makes it possible to trace an individual participant balance back to the fund economics that created it.

63. A Worked Comparison

Assume a fund generates €30 million of carry from three investments:

Three participants are involved.

Fund-Level Architecture

Allocations:

A:

€30m × 40% = €12m

B:

€30m × 35% = €10.5m

C:

€30m × 25% = €7.5m

Investment-Level Architecture

Partner A:

€15m × 60% + €10m × 20% + €5m × 10%

= €9m + €2m + €0.5m

= €11.5m

Partner B:

€15m × 25% + €10m × 50% + €5m × 20%

= €3.75m + €5m + €1m

= €9.75m

Partner C:

€15m × 15% + €10m × 30% + €5m × 70%

= €2.25m + €3m + €3.5m

= €8.75m

Total:

€11.5m + €9.75m + €8.75m = €30m

Both architectures allocate exactly the same €30 million.

But they produce different participant outcomes.

Therefore:

Same Fund Carry + Different Participant Allocation Architecture = Different Individual Carry

64. The Architecture Determines the Meaning of the Cap Table

A cap table cannot be interpreted independently of the allocation architecture.

Consider:

Partner A: 25%

That could mean:

25% of Fund I Carry

or:

25% of 2027 Vintage Carry

or:

25% of Investment A Carry

or:

25% of European Growth Carry

or:

25% of the Leadership Pool

The percentage itself does not identify the economics.

Therefore:

Cap Table Percentage + Defined Carry Pool = Meaningful Economic Interest

This is why the next Part moves from allocation architecture to the nature of the interests themselves.

65. Architecture Before Points

It can be tempting to begin carry-plan design by asking:

How many points should each person receive?

That question comes too early.

Before points can be allocated, the plan needs to determine:

Points in what?

The correct sequence is:

Define Carry Source

↓

Define Allocation Architecture

↓

Define Carry Pools

↓

Define Units / Points / Percentages

↓

Allocate Participant Interests

Therefore:

Architecture Before Allocation

and:

Pool Before Percentage

66. Core Principles

Part III establishes the structural layer between carry-plan objectives and participant ownership.

The principal concepts can be summarised as follows:

Fund Waterfall Architecture ≠ Participant Carry Allocation Architecture

Define the Economic Population → Define the Carry Pool → Allocate Participant Interests

Fund-Level Allocation ≠ Equal Allocation

One Fund ≠ Necessarily One Carry Pool

One Participant ≠ Necessarily One Carry Interest

Investment-Level Participant Allocation ≠ Deal-by-Deal Fund Waterfall

Fund-Level Carry Exists ≠ Investment-Level Carry Attribution Is Automatically Known

Σ Investment Carry Attribution = Relevant Fund Carry Pool

Investment-Level Upside Allocation Requires Defined Treatment of Investment-Level Downside

Allocation Architecture → Economic Incentives → Potential Behaviour

Legal Vehicle ≠ Necessarily Participant Allocation Population

One Carry Source → Multiple Carry Pools

Multiple Carry Sources → One Participant Pool

Calculate at the Required Economic Population → Then Aggregate

Effective Aggregate Percentage ≠ Underlying Carry Ownership

Allocation Complexity → Data Dimensionality

Simple Formula × Many Economic Populations = Complex Administration

Economic Granularity → Administrative Burden

Every Unit of Carry Should Have a Defined Allocation Destination

Unallocated ≠ Unexplained

Identify the Pool Before Applying the Participant Percentage

Same Fund Carry + Different Participant Allocation Architecture = Different Individual Carry

Cap Table Percentage + Defined Carry Pool = Meaningful Economic Interest

Architecture Before Allocation

Pool Before Percentage

The architecture has now established where participant economics exist.

Part IV turns to the next question:

What exactly does a participant own within those carry pools?

The answer may be expressed through percentages, points, units, classes or other economic interests.

Understanding those instruments is necessary before the carry cap table itself can be constructed.

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References and Further Reading

Internal Allocation of Private Equity Economics

Ivashina, Victoria and Josh Lerner. “Pay Now or Pay Later? The Economics within the Private Equity Partnership.” Journal of Financial Economics, Vol. 131, No. 1, 2019, pp. 61–87.

Relevant subjects include:

• allocation of fund economics among individual partners;
• carried-interest ownership;
• management-company ownership;
• differences in economic allocations between partners;
• founder economics;
• senior versus junior partner economics;
• partner departures;
• succession;
• organisational stability;
• and the relationship between internal economic allocation and future fundraising.

The study examines 717 private equity partnerships and provides empirical evidence that the distribution of fund economics between individual partners can vary substantially. sciencedirect.com

Fund-Level Versus Deal-by-Deal Carry

Heidrick & Struggles. 2025 North America Private Equity Investment Professional Compensation Survey. 2025.

Relevant subjects include:

• fund-level carried-interest participation;
• deal-by-deal carried-interest participation;
• differences in carry structures by professional seniority;
• capital commitments associated with employee carry;
• partner and managing-partner participation;
• and contemporary private equity compensation practice.

The survey of 606 investment professionals specifically distinguishes between carry awarded on a fund basis and on a deal-by-deal basis. For partner/managing director respondents, 70% reported fund-basis carry and 30% deal-by-deal carry; the proportions differ across professional levels. heidrick.com

Future Funds and Successive Fund Generations

Chung, Ji-Woong, Berk A. Sensoy, Léa 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:

• current fund performance;
• carried-interest incentives;
• future fundraising;
• successive fund generations;
• GP lifetime economics;
• explicit versus implicit performance incentives;
• and the relationship between current performance and future economic opportunity.

The paper demonstrates that private equity compensation incentives extend beyond carried interest in the current fund because current performance can affect the GP's ability to raise subsequent funds. NBER

Carry Allocation, Retention and Partnership Stability

Ivashina, Victoria and Josh Lerner. “Pay Now or Pay Later? The Economics within the Private Equity Partnership.” Journal of Financial Economics, Vol. 131, No. 1, 2019, pp. 61–87.

Particularly relevant to:

• differentiated participant economics;
• founder versus successor economics;
• allocation inequality;
• retention;
• departures of senior partners;
• succession;
• and the consequences of internal economic architecture for organisational continuity.

The authors find an association between lower individual shares of partnership economics, inequality in the distribution of those economics and departures of senior partners. They also find that senior-partner departures are associated with weaker subsequent fundraising. sciencedirect.com

Carry Allocation Architecture

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:

• fund-level carry allocation;
• vintage-year allocation;
• deal-by-deal allocation;
• carry points;
• multiple participant populations;
• participant turnover;
• new joiners;
• reallocation;
• forfeiture;
• vesting;
• and administration of increasingly granular carry structures.

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:

• fund-wide versus investment-specific incentives;
• participant behaviour;
• collective versus individual incentives;
• investment attribution;
• collaboration;
• risk-taking incentives;
• and the relationship between carry architecture and participant behaviour.

Carry Architecture and Participant Administration

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:

• multiple carry-point populations;
• separate allocations between funds and investments;
• participant changes;
• historical ownership;
• spreadsheet administration;
• participant statements;
• unrealised carry reporting;
• and the increasing administrative burden associated with granular carry structures.

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