What Is Carried Interest? A Guide to Private Equity Carry and Borrowing Against It

Carried interest is the share of profits that a private equity or venture capital fund's General Partners (GPs) receive once investors have recovered their original capital and any agreed preferred return. For many fund managers, carried interest represents a significant source of long-term wealth, but distributions are often tied to portfolio company exits and may not be received for several years. As a result, some private equity professionals choose to borrow against their anticipated carried interest, accessing liquidity before distributions are paid.

In this guide, we'll explain how carried interest works, what a typical 20% carry means, when it is paid, and how specialist carried interest financing can provide access to capital without waiting for future fund distributions.

How Does Carried Interest Work?

Carried interest is only paid when a private equity or venture capital fund generates successful investment returns. While the exact waterfall differs between funds, the process typically follows the same broad structure.

Fund is established

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Limited Partners (LPs) commit capital

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General Partner (GP) invests in portfolio companies

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Portfolio companies are sold or refinanced (exit)

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LPs receive their original capital back

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LPs receive any agreed preferred return (hurdle rate)

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Remaining profits are shared

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GP receives carried interest

The General Partner (GP) is responsible for sourcing, managing and exiting investments, while Limited Partners (LPs) provide most of the capital. Once investments are realised through successful exits, the proceeds are distributed according to the fund's partnership agreement.

In most private equity funds, LPs are repaid their invested capital first. They may then receive a preferred return, also known as a hurdle rate, before the GP becomes entitled to a share of the remaining profits through carried interest. A common structure is a 20% carry, although the exact percentage varies between funds.

Because carried interest is usually only distributed after portfolio exits, GPs may wait several years before receiving payment. This is why some private equity professionals choose to use specialist financing secured against their anticipated carried interest, allowing them to access liquidity before distributions are made.

Frequently Asked Questions

What Does 20% Carried Interest Mean?

A 20% carried interest means that the General Partner (GP) is entitled to receive 20% of the profits remaining after the fund's Limited Partners (LPs) have been repaid their invested capital and any agreed preferred return or hurdle rate. The remaining 80% of those profits is distributed to investors according to the fund's partnership agreement.

It is important to note that the GP does not receive 20% of the fund's total assets, revenue or gross investment proceeds. Carried interest is only earned once investments have been successfully realised and the agreed distribution waterfall has been satisfied.

Simplified Example

Suppose that, after investors have received their original capital and any preferred return, £100 million of profits remain available for distribution.

This is a simplified example. Carried interest is calculated according to the fund's partnership agreement and may be affected by hurdle rates, catch-up provisions, clawback provisions and other waterfall mechanics.

When Is Carried Interest Paid?

Carried interest is typically paid after a private equity or venture capital fund has successfully realised an investment. This usually happens when a portfolio company is sold, refinanced or taken public, allowing the fund to distribute proceeds to investors.

Before any carried interest is distributed, Limited Partners (LPs) generally receive their original capital back along with any agreed preferred return or hurdle rate. Only once these obligations have been met does the General Partner (GP) become entitled to a share of the remaining profits.

Unlike a salary or annual bonus, carried interest is not paid on a fixed schedule. The timing depends on when investments are successfully exited, meaning GPs may wait several years between making an investment and receiving a carried interest distribution. While some funds begin making distributions earlier, others may not generate carry until later in the fund's life, particularly where portfolio companies are held for longer to maximise value.

In recent years, higher interest rates, subdued deal activity and a slower M&A environment have extended holding periods across many private equity portfolios. As exits have been delayed, many fund managers have found themselves with significant wealth tied up in unrealised carried interest but limited access to liquidity in the meantime.

This has contributed to growing demand for carried interest financing. By borrowing against anticipated future carried interest distributions, eligible General Partners may be able to access capital before portfolio exits occur, helping fund GP commitments, co-investments, property purchases, business ventures or other investment opportunities without waiting for distributions to be paid.

Can You Borrow Against Carried Interest?

Yes, it is possible to borrow against carried interest through specialist lenders. Unlike traditional lenders, which typically assess salaried income or readily available assets, specialist finance providers can consider the value of anticipated carried interest distributions as part of a bespoke lending assessment.

Rather than waiting for future fund exits, eligible General Partners (GPs) may be able to unlock liquidity against expected carried interest before distributions are received. The proceeds can then be used for a wide range of purposes, including funding GP commitments, making co-investments, purchasing property, refinancing existing borrowing or supporting wider investment and business opportunities.

Every transaction is assessed individually. Specialist lenders will typically review factors such as the quality and maturity of the underlying funds, the expected timing and size of future distributions, historical fund performance, and the borrower's overall financial position. They will also consider the wider balance sheet, including existing assets, liabilities and other sources of wealth, to build a comprehensive picture of the borrower's financial strength.

Because carried interest is a complex asset, financing is rarely based on a standard formula. Instead, lenders use bespoke underwriting to evaluate each opportunity, structuring facilities around the expected cash flows and risk profile of the underlying investments.

At Enness, we arrange carried interest financing for clients in the UK, Europe and the US, working with specialist lenders that understand private equity remuneration structures. Whether the objective is to access liquidity ahead of distributions or finance a new investment opportunity, facilities can often be tailored to reflect the borrower's wider wealth, investment portfolio and long-term financial strategy.

How Does Carried Interest Financing Work?

Carried interest financing allows eligible private equity professionals to access liquidity before future carried interest distributions are paid. Rather than relying solely on current income, specialist lenders assess the expected value of future carried interest and structure facilities around those anticipated cash flows.

The process is typically as follows:

Initial assessment

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Review and valuation of anticipated carried interest

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Bespoke financing facility is structured

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Future carried interest distributions are received

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Loan is repaid from distributions or another agreed repayment source

Unlike conventional lending, carried interest financing is based on bespoke underwriting rather than standard affordability metrics. Specialist lenders will typically assess the quality and maturity of the underlying funds, projected carried interest distributions, historical fund performance, expected exit timelines and the borrower's wider financial position.

The expected value of future carried interest is then considered alongside the borrower's overall balance sheet, including other investments, assets and liabilities. This allows lenders to structure facilities that reflect the individual's broader wealth rather than focusing solely on salary or annual income.

Once approved, funding can often be used for a wide range of purposes, including GP commitments, co-investments, property acquisitions, refinancing existing debt, business investment or broader liquidity planning. When carried interest distributions are eventually received, the facility is typically repaid from those proceeds or another agreed source, depending on the structure of the loan.

Because every private equity fund and remuneration structure is different, carried interest financing is tailored to the individual borrower. Specialist lenders in the UK, Europe and the US can structure facilities around the timing, size and expected profile of future distributions, providing flexibility while preserving long-term investment strategies.

Typical Terms of Carried Interest Loans

Every carried interest financing facility is structured around the borrower's individual circumstances, the underlying private equity funds and the expected timing of future distributions. As a result, terms vary between lenders and transactions.

Typical market terms may include:

• Interest rate: Approximately 12%–18% per annum
• Loan term: Up to five years
• Interest structure: Payment-in-Kind (PIK), where interest is rolled into the loan balance, or cash-pay, where interest is paid periodically during the term
• Repayment: Commonly repaid from future carried interest distributions through a full cash sweep, although alternative repayment structures may be available
• No-call period: Approximately 18 months, depending on the lender and facility
• Arrangement fee: Around 2% of the loan amount

These terms are indicative only. The final structure will depend on factors such as the value and maturity of the carried interest, expected exit timelines, the quality of the underlying funds, the borrower's wider balance sheet and the lender's underwriting criteria.

Note: Carried interest financing is highly bespoke. Terms vary between lenders and should not be considered guaranteed or representative of every transaction.

Why Borrow Against Carried Interest?

For many private equity professionals, carried interest represents a significant proportion of their long-term wealth. The challenge is that this wealth is often tied up in unrealised investments, with distributions only becoming available once portfolio companies are successfully exited.

Borrowing against carried interest can provide access to liquidity without requiring borrowers to wait several years for future distributions. Rather than disrupting long-term investment strategies or selling other assets, specialist financing allows eligible General Partners to unlock capital while preserving exposure to future carried interest.

Common uses for carried interest financing include:

• Funding GP commitments to new private equity or venture capital funds without waiting for previous investments to realise.
• Making co-investments alongside portfolio companies or new investment opportunities as they arise.
• Purchasing residential or investment property while preserving liquidity across a wider investment portfolio.
• Diversifying personal wealth by accessing capital without needing to dispose of existing investments prematurely.
• Improving liquidity for tax obligations, refinancing existing borrowing or other significant financial commitments.
• Supporting business investment, acquisitions or entrepreneurial ventures while maintaining exposure to future carried interest distributions.

Because every borrower has different objectives, carried interest financing is highly bespoke. Facilities can often be structured around the anticipated timing of future distributions, allowing borrowers to access capital when opportunities arise rather than when fund exits occur.

For private equity professionals whose wealth is concentrated in future carried interest, specialist lending can provide the flexibility to pursue new investments and manage cash flow while continuing to participate in the long-term upside of their funds.

Are Personal Guarantees Required?

Not always. Whether a personal guarantee is required depends on the lender, the size of the facility and the borrower's overall financial profile.

Specialist lenders typically assess the anticipated value of future carried interest distributions alongside the borrower's wider balance sheet, including other investments, assets and liabilities. Where the overall financial position is particularly strong, lenders may be able to structure facilities with different security arrangements.

Because carried interest financing is bespoke, there is no standard approach. The requirement for a personal guarantee is determined on a case-by-case basis during the underwriting process.

How Are Carried Interest Loans Repaid?

Carried interest loans are commonly repaid from future carried interest distributions when they are received following successful portfolio exits.

Many facilities are structured with a full cash sweep, meaning that all or part of the carried interest distribution is automatically used to repay the outstanding loan balance. Depending on the lender and the agreed structure, interest may either be Payment-in-Kind (PIK), where it accrues and is added to the loan balance, or cash-pay, where interest is paid periodically throughout the term.

Some facilities may also allow repayment from another agreed source of wealth, depending on the borrower's wider financial position and the terms of the facility.

Is Carried Interest the Same as a Performance Fee?

No. Although both are forms of performance-based compensation, carried interest and performance fees are used in different parts of the investment industry and operate differently.

Carried interest is most commonly associated with private equity and venture capital funds. It represents the share of profits earned by a fund's General Partners (GPs) after investors have received their invested capital and any agreed preferred return.

A performance fee, by contrast, is typically charged by hedge funds and investment managers. It is usually calculated as a percentage of investment gains above a benchmark or high-water mark and is often assessed more frequently than carried interest.

The distinction is also important from a lending perspective. While specialist lenders may provide finance against anticipated carried interest distributions, the underwriting approach for performance fee income is typically different because the timing, predictability and underlying assets are not the same.

Real Examples of Carried Interest Financing

Carried interest financing is a highly specialised area of lending, and every transaction is structured around the borrower's individual circumstances, the underlying funds and the anticipated timing of future distributions.

Below are two examples of facilities arranged by Enness for private equity professionals seeking to unlock liquidity against anticipated carried interest.

£5 Million Facility Secured Against Private Equity Carried Interest

Client: Private equity executive

Challenge: Unlock liquidity before future carried interest distributions while preserving long-term investment exposure.

Solution: Enness arranged a bespoke £5 million financing facility secured against the client's anticipated private equity carried interest. The structure enabled the borrower to access capital without waiting for future portfolio exits, providing flexibility for wider investment opportunities while maintaining exposure to future distributions.

→ Read the full case study

£4.5 Million Lending Against Carried Interest From £13.5 Million Holdings

Client: Senior private equity professional

Challenge: Raise liquidity against a substantial carried interest position without disrupting long-term investment strategy.

Solution: Enness arranged a £4.5 million facility secured against approximately £13.5 million of anticipated carried interest holdings. The bespoke structure reflected the expected value and timing of future distributions, allowing the client to access capital while retaining participation in the long-term upside of the underlying investments.

→ Read the full case study

Why this matters

These transactions demonstrate how carried interest financing can provide liquidity before future distributions are paid. Because every private equity fund, distribution profile and borrower is different, facilities are individually structured to reflect the underlying assets, anticipated cash flows and the client's wider financial position.

Conclusion

Carried interest is one of the defining features of private equity compensation, rewarding General Partners for generating value once investors have received their capital and any agreed preferred return. While it can represent significant long-term wealth, distributions are often tied to portfolio exits, meaning fund managers may wait years before receiving them.

Specialist carried interest financing provides an alternative. By borrowing against anticipated future distributions, eligible private equity professionals may be able to access liquidity sooner, whether to fund GP commitments, make co-investments, purchase property, diversify their wealth or invest in new business opportunities. Every facility is individually structured, taking into account the underlying funds, expected cash flows and the borrower's wider financial position.

At Enness, we work with specialist lenders across the UK, Europe and the US to arrange bespoke financing solutions for private equity professionals. Whether you're exploring the concept of carried interest financing for the first time or looking to raise capital against an established carried interest position, our team can help assess the options available and structure a facility tailored to your circumstances.