Carry and management fees remain the core economic levers by which private markets allocate risk, reward, and incentives between limited partners and general partners. In venture capital (VC) and private equity (PE), the standard carry structure—most commonly a 20% carried interest on profits once a preferred return (hurdle) is met—coupled with management fees on committed or invested capital, underpins GP liquidity, incentivizes value creation, and finances ongoing fund operations. Yet the economics are not static. As LPs demand greater transparency, alignment, and net-of-fees performance disclosure, and as fund structures evolve in response to market cycles, the traditional 2/20 paradigm is being recalibrated. Fees and carry no longer function purely as revenue lines for managers; they are a central determinant of net IRR, DPI, and the risk/return profile that LPs can reasonably expect from different vintages and strategies.
From a predictive standpoint, we expect management fees to converge toward more nuanced schedules—often tapering more aggressively after the investment period, with offsets for co-investments and stronger emphasis on transparency around fee waterfalls. Carry economics will continue to reflect a balance between LP protection (hurdles, waterfalls, and catch-up mechanics) and GP incentives (alignment with exit outcomes). The interplay between fee levels, hurdle design, and catch-up mechanics will meaningfully shape net capital allocation, time-to-first-dissipation of fees, and ultimate distributions to LPs versus GP upside. In a market where capital is increasingly priced for risk, the most successful funds will be those that optimize these structures to align incentives with durable value creation, while offering LPs defensible, performance-linked economics that survive market stress and exit cycles.
Against this backdrop, LPs are scrutinizing fund economics across fund size, vintage, geography, and strategy. Managers with scalable platforms, strong deal flow, and differentiated value-add capabilities are more capable of sustaining competitive carry levels while offering fee offsets, co-investment opportunities, and transparent waterfall disclosures. Meanwhile, the rise of co-investment programs, evergreen and hybrid vehicles, and secondary markets introduces new dimensions to how carry and fees are negotiated, disclosed, and monetized. For investors, the critical task is to model net returns under a range of fee and carry scenarios, assess the sensitivity of DPI/TVPI to fee structures, and examine the alignment signals embedded in waterfall mechanics and hurdle configurations.
In short, understanding carry and management fees is not a mere trivia of fund economics; it is essential to portfolio construction, risk management, and performance attribution in venture and private equity investing. The following sections unpack the market context, core mechanics, and forward-looking scenarios that strategic investors should integrate into diligence and valuation models.
Across global venture markets, the economics of carry and management fees have evolved in response to shifting fundraising dynamics, regulatory considerations, and investor pushback on opaque or onerous fee structures. The traditional 2% annual management fee on committed capital during the investment period (typically five to six years) provides the operating runway for sourcing, diligence, portfolio support, and fund administration. In subsequent years, funds frequently reduce the fee to a lower rate—commonly around 1% to 1.5%—on invested or remaining capital for the balance of the fund’s life. This cadence reflects the reduced operating needs as the portfolio matures, while preserving GP cash flow to sustain post-investment activities, follow-on investments, and monitoring obligations.
Carried interest remains the principal performance fee: a typical 20% share of profits after the LPs have received their preferred return, often framed within a waterfall that includes a hurdle rate (commonly 8%), a GP catch-up mechanism, and a final distribution split that implies a 80/20 LP/GP split once the hurdle is cleared. Variations abound. Some funds employ higher carry (e.g., 25% or more) to attract top-tier GPs or to compensate for higher risk, illiquidity, or extended fund life. Others implement a lower carry (e.g., 15%) to secure anchor LP commitments in highly competitive vintages or to differentiate in markets where LPs demand tighter alignment terms. Hurdles can range from 0% to 8% in practice, with 0% hurdles often seen in market-tested evergreen or certain co-investment-led structures, though the 8% hurdle remains the most common anchor in traditional closed-end funds.
Waterfall design and catch-up provisions are central to how carry accrues. In a classic model, LPs receive return of capital plus the hurdle before GP catch-up accelerates to award the GP a pre-defined share of subsequent profits, typically culminating in a 20% GP carry once the aggregate profits cross a specified level. The specifics—whether the catch-up is 100% or stepped, whether there is a true-up at the end of the fund life, and how clawbacks are structured—vary by fund and are a focal point of LP negotiations. The economic sensitivity to these features is material: even small changes in the hurdle rate, catch-up tempo, or carry split can materially alter the net IRR and DPI that LPs realize, especially in mid-to-late-stage exits or extended liquidity cycles.
Geographic and structural variations also shape the landscape. In Europe and Asia, fund structures have historically exhibited greater diversity in fees and waterfalls, with local regulatory and tax considerations influencing the design. In the United States, regulatory scrutiny around carried interest, tax treatment, and compensation constructs continues to inform structuring choices, even as market practice remains anchored in the traditional framework for mature funds. The rise of evergreen funds, regulated by different cash-flow dynamics and often featuring performance-linked compensation in lieu of some or all traditional management fees, adds a further layer of complexity to the market dynamics and investor expectations.
Another notable trend is the increasing use of fee offsets and co-investment rights. LPs frequently negotiate for partial or full offset of management fees with co-investment rights, effectively lowering the net management fee burden when the GP offers corresponding co-investment opportunities alongside the fund. The economics of these offsets depend on the size and timing of co-investments, as well as the portfolio’s exit profile. In practice, offsets can ranged from partial to full, altering the net cash-on-cash economics and the time horizon over which the GP recovers its management costs. These dynamics have made diligent tracking of fee disclosures, co-investment terms, and waterfall language essential for accurate performance attribution and risk assessment.
Tax treatment of carried interest continues to be a focal point for policy makers and practitioners. In several jurisdictions, carried interest benefits from favorable capital gains treatment, which underpins the economic logic of equity-like incentives for fund managers. However, proposals to tighten or recharacterize this treatment could affect net GP economics and, by extension, the attractiveness of VC and PE strategies to risk-adjusted capital. Investors must factor these potential changes into scenario planning, particularly for funds with long tails and high sensitivity to exit timing and tax outcomes.
Core Insights
Fund economics hinge on the trade-off between predictable, scalable management fees and performance-based carry that truly aligns incentives with exit outcomes. The predictive core is that the net economics—after accounting for management fees, carry, hurdle rates, catch-up, and clawbacks—will determine the distribution profile across vintages and fund strategies. For LPs, a lower net management fee, robust fee offsets, transparent waterfall mechanics, and a high-probability path to DPI generation are critical to achieving favorable net returns. For GPs, higher carry remains a lever to amplify returns, but only where the underlying portfolio performance justifies the risk and where fee structures do not deter high-quality LP cohorts.
From a portfolio-building perspective, the impact of carry and fees on the risk-adjusted return is threefold. First, management fees affect the gross internal rate of return by consuming capital that could have been deployed into portfolio companies or co-investments. Second, the hurdle and catch-up mechanics directly shape the tempo and magnitude of GP upside; a steeper catch-up accelerates GP alignment with exit outcomes but can dilute early LP protections if the portfolio underperforms. Third, the distribution waterfall and clawback provisions materially influence the realized DPI, particularly in cycles with early deltas between paper gains and realized exits. Investors who stress-test the waterfall under multiple exit environments—highly favorable, moderate, and distressed—gain insights into the likelihood and magnitude of GP earnouts and LP recovery profiles across the fund life.
In practice, LPs seek transparency around fee disclosures and net-of-fee performance. This includes explicit calculation bases for mgmt fees (committed vs invested capital), clarity on whether fee offsets apply and how co-investments are treated within the fee scheme, and detailed waterfall diagrams that illustrate the path to carry realization. The more standardized and auditable these disclosures are, the more accurately LPs can benchmark funds, compare strategies, and allocate capital across vintages. For GPs, the ability to articulate a coherent, defensible economics narrative—grounded in the fund’s strategy, portfolio quality, and exit potential—becomes a differentiator in fundraising, particularly in highly competitive markets where LPs maintain choice over allocations and terms.
Net-net, carry and management fees continue to be a dynamic, market-driven set of instruments that require disciplined diligence. The most resilient funds will balance predictable operating liquidity with performance-based upside, deliver transparent disclosures, and implement flexible, LP-friendly terms that still reward exceptional value creation. Investors who model these economics against multiple return scenarios—considering exit timing, hurdle alignment, and potential tax outcomes—will be best positioned to manage risk and optimize portfolio-level outcomes in both prevailing and stressed markets.
Investment Outlook
The near-term outlook for carry and management fees in VC and PE is characterized by gradual normalization rather than rapid upheaval. In a world of rising LP scrutiny and capital discipline, we anticipate several convergent forces shaping terms over the next 12–24 months. First, continued pressure on net fee levels from large institutional LPs will push managers toward lower baseline mgmt fees, more frequent and transparent fee offsets, and clearer payoff structures tied to overarching fund performance. This trend is likely to be most pronounced in mature, mega-fund ecosystems where competitive intensity is high and LPs demand more predictable economics for long-hold capital.
Second, the proliferation of co-investment programs and parallel investment vehicles will progressively compress net management fees for funds that can offer meaningful, high-quality co-investment opportunities on favorable terms. Co-investments enable LPs to deploy additional capital with reduced fee drag, effectively turning fee economics into a negotiable variable rather than a fixed assumption. Funds that can demonstrate high-quality deal flow and robust governance around co-investments will be advantaged in fundraising and in maintaining favorable fee economics.
Third, the growing popularity of evergreen and hybrid fund structures introduces new levers for fee design. Evergreen fund economics often eschew traditional investment-period-driven mgmt fees in favor of ongoing, performance-linked compensation, with less reliance on capped fundraising rounds and more emphasis on sustainable cash flows. While evergreen models offer LPs lower fee friction in some cases, they also demand rigorous transparency around performance expectations and capital recycling rules. These structures may gradually become a larger slice of the alternative investments landscape, particularly for LPs seeking perpetual exposure to venture and growth opportunities with different liquidity profiles.
From a risk management perspective, regulatory and tax considerations will remain central to forward planning. Any evolution in the tax treatment of carried interest—whether through legislative changes or reinterpretations of existing law—could materially alter the economics of fund sizing, the attractiveness of certain strategies, and the attractiveness of early-stage versus later-stage bets. Funds and LPs that stress-test tax-sensitive scenarios and incorporate tax-efficient structuring into their planning will be better prepared to manage post-commitment volatility in net distributions and carry realization windows.
In terms of portfolio construction, we expect a continued emphasis on transparency in fee disclosures and the inclusion of performance attribution that isolates the impact of carry and fees from pure investment results. LPs will increasingly seek granular, fund-wide and portfolio-level analytics that quantify how much of the net return is attributable to management fees versus realized carry, and how waterfall timing interacts with exit dynamics. For managers, we anticipate greater demand for evidence-based term sheets that balance aspirational carry with credible, defensible hurdle and catch-up architectures that can withstand cycles of illiquidity and uneven exit momentum.
Future Scenarios
Scenario A: Constrained fees, higher efficiency. Management fees trend toward 1.25%–1.5% during investment and terminal periods, with robust fee offsets tied to co-investments and clear waterfall documentation. Carried interest remains around 20%, but hurdle rates and catch-up terms become more modular, allowing LPs to adjust for strategy risk and market cycle. In this scenario, net returns to LPs improve on a risk-adjusted basis due to lower fixed costs and enhanced alignment while GP upside remains sufficiently compelling for top-tier managers who can consistently generate outsized exits.
Scenario B: Balance of fee discipline and performance-based upside. Management fees stabilize in a 1.5%–2.0% band with heavier reliance on carry as the principal performance fee. The hurdle rate sits at 6%–8%, with a transparent 100% catch-up that accelerates GP realization of carry as profits accrue. Co-investment rights are widely offered and effectively offset a portion of the management fee, preserving investor incentives while maintaining manager liquidity. This scenario reflects a mature market where LPs are confident in portfolio construction and exit timing, and GPs maintain the optionality to invest in high-conviction opportunities.
Scenario C: Tax and regulatory headwinds compress carry economics. If carried interest faces tighter tax treatment or additional compliance costs, GPs may respond by adjusting fund sizes, tweaking carry shares, or shifting to fee-light structures financed by higher performance upside or alternative compensation. In this environment, LPs gain some protection from net carry erosion but must weigh the trade-off against potential reductions in fund-scale and resource allocation. The net effect could be a slower pace of new fund formation, particularly among smaller or mid-market managers without demonstrable scale or differentiated value adds.
Scenario D: Evergreen and hybrid dominance. A growing suite of evergreen and hybrid structures absorbs capital with ongoing, performance-linked compensation models. These funds emphasize continuous value creation, robust governance, and explicit recycling of capital, potentially reducing the emphasis on traditional committed capital cycles and long-run fund life economics. For LPs, this could translate into more flexible liquidity profiles and ongoing access to top-tier deal flow, albeit with novel risk management and reporting demands for ongoing performance attribution.
Conclusion
Carry and management fees sit at the intersection of fund strategy, incentive alignment, and investor outcomes. As capital markets evolve, the most effective approaches will be those that harmonize predictable, transparent operating costs with substantial, well-structured upside for fund managers who deliver durable value. In practice, this means clearer waterfall mechanics, meaningful fee offsets for co-investments, and discipline around hurdle rates and catch-up schedules that can withstand diverse market cycles. For LPs, the objective is to translate these mechanics into robust risk-adjusted return expectations across vintages, while maintaining the flexibility to adapt to shifting regulatory, tax, and liquidity environments. For GPs, the challenge is to craft economics that sustain high-quality deal sourcing, rigorous portfolio management, and credible exit outcomes without sacrificing alignment or governance standards. The ongoing dialogue between LPs and GPs around fee transparency, waterfall clarity, and performance attribution will determine which funds deliver the most compelling net upside across the next cycle of venture and private equity investing.
Guru Startups analyzes Pitch Decks using advanced large language models (LLMs) across more than 50 evaluation points to accelerate diligence and risk assessment. This framework covers market validation, unit economics, product and technology differentiation, competitive moat, team capabilities, go-to-market strategy, regulatory and IP considerations, financial model integrity, capitalization table dynamics, funding requirements, burn rate, runway, liquidity paths, exit potential, and governance and alignment structures such as waterfall clarity and fee disclosures. The platform quantifies investment theses with objective signals and provides practitioners with a structured, scalable method to compare opportunities. For more information on how Guru Startups integrates AI-driven diligence into deal execution, visit https://www.gurustartups.com.