Private equity fees and carry: how 2 and 20 works, with examples

What investors pay, in one table

The fundamentals section starts with how a private equity fund works. This page follows the money that flows to the manager and what shapes it.

What is the 2 and 20 rule?

“2 and 20” is the market’s shorthand: 2% of the fund’s assets a year as a management fee, and 20% of profit above a hurdle rate as carried interest⁶. Hong Kong’s tax authority uses the phrase in its 2016 practice note on offshore private equity funds, and calls it the industry standard pay formula⁶. It is also a rule of thumb that has slipped. In the Metrick and Yasuda study of 238 funds raised from 1992 to 2006, 2 percent was the most common initial fee². By 2021, ILPA’s survey found rates holding at 1.5 to 2.0%³.

IOSCO’s description is the safer starting point. Investors pay a management fee, typically 1 to 2% a year¹. The manager also earns carried interest of circa 20% of the fund’s profit above a pre-agreed cash return, the hurdle rate¹. Read “2 and 20” as the upper edge of a range, not the rule.

About 60 percent of expected manager revenue in the study came from fixed components that do not depend on performance². That is the plain reason the fee is negotiated hard: it pays whether or not the fund makes money.

How the management fee is charged

The fee is annual. During the investment period it is generally a percentage of total commitments, and after it a percentage of invested capital¹. The study found the most common historical method was a constant percentage of committed capital². At 2 percent a year for ten years, lifetime fees would be 20 percent of committed capital, leaving 80 percent to invest².

Most funds now concede something. A majority of funds in the study gave limited partners concessions after the investment period². One schedule has a 2 percent fee for the five-year investment period, falling by 25 basis points a year for the next five². Another cuts the percentage and changes the basis from committed to net invested capital². ILPA wants the same direction: fees should step down significantly at the end of the investment period, when a follow-on fund is formed, or when the term is extended⁴.

Worked example (our arithmetic) on a $100M commitment, using the study’s step-down schedule². The study gives the pattern, not these dollar amounts.

A flat 2 percent would cost $20M over the same ten years, and the step-down saves $3.75M (our arithmetic), which matches the study’s expectation that lifetime fees come in below 20 percent of committed capital for most funds².

What the fee covers, and what it does not

ILPA’s position is that the management fee should rest on the normal operating costs of the fund⁴. Overheads, the salaries of the manager’s staff and advisers, travel and the cost of investing should sit inside it rather than be charged to the fund⁴.

Practice drifts the other way. In the 2021 survey, deal sourcing costs, adviser and affiliate salaries and regulatory filings were routinely excluded from the fee³. A quarter of responding LPs saw administrative costs such as in-house legal, accounting and software moved outside it³. The headline rate therefore understates what a fund costs.

Two more charges sit outside the fee. Buyout managers may charge portfolio companies fees for work done on a fund transaction¹, and may keep collecting director’s, monitoring and consultancy fees afterwards¹. Our reading: when you compare two funds, compare the fee, the expense clause and the portfolio-company fee clause together. One number is not a comparison.

Private capital fees: venture capital against buyout

The two main strategies are charged differently. In the study, median lifetime fees were 12 percent of committed capital for buyout funds and 17.75 percent for venture funds². Transaction and monitoring fees are common features of buyout funds and rare in venture funds². Hurdles show the same split: 93.1% of buyout funds had one, against 47.6% of venture funds². A venture investor pays a higher fee on a smaller fund and rarely gets a hurdle. A buyout investor pays a lower fee but meets more charges around it. The strategy page explains why the two differ.

What is 20% carry?

Carry, or carried interest, is the general partner’s share of a fund’s profit⁸. The standard allocation has historically been 20% for buyout and venture funds, with some variability⁸. All 144 buyout funds in the study used 20 percent². The word “interest” has nothing to do with interest rates⁸. Carry is paid only on a successful exit, which may take years⁸.

How to calculate carried interest

Carry is arithmetic on three terms²:

To calculate carry, measure profit on the agreed basis, test it against any hurdle and catch-up, then apply the level. Where a fund has a hurdle, virtually all hurdles ran between six and ten percent², and most had a catch-up rate of 100 percent². Not every fund has a hurdle and a catch-up⁸. After the hurdle the split moves toward the manager, often 20% manager and 80% investors⁸.

ILPA argues for rules that favour investors. Carry should be calculated on net profit, after fund-level expenses⁴. No carry should be taken on current income distributions⁴. A “hard hurdle”, where carry applies only to profit above the investors’ preferred return, is the form ILPA prefers⁴.

The worked example on the fund page takes a $20M profit through capital return, hurdle, catch-up and a final split².

Whole-of-fund or deal-by-deal?

A whole-of-fund waterfall returns all contributions plus the preferred return before the manager earns any carry. ILPA calls that best practice⁴, and its 2021 survey found it still the dominant structure worldwide³. A deal-by-deal waterfall pays carry as each deal exits. It starts paying sooner, so it needs a safety net, and the safety net is the clawback: when early carry is taken, investors can typically claw it back if later performance is too weak to return the full carry basis².

Worked example (our arithmetic): two deals, 20% carry, no hurdle, no fees. The definitions come from the sources^2,4. The deal sizes are ours.

ILPA’s view is that an “all capital back” waterfall is the best way to minimise clawbacks⁴. Where clawbacks do arise, it asks for accrued carry to sit in escrow with significant reserves, for example 30% of carry distributions or more⁴.

Fees in Asia and in Hong Kong tax

Geography had little impact on management fee rates in the 2021 survey, but a gap showed in larger funds³. Among LPs invested in growth and buyout funds, those in Asia Pacific funds of $3-5B reported rates below 2% in 90% of cases, against 76% in North America and Europe³. That is a sample of LP respondents, not a census of funds.

Tax shapes where managers sit. In 2016 the Hong Kong Inland Revenue Department wrote that carried interest paid to a Hong Kong investment manager or advisor would be examined when that person was not adequately paid for its Hong Kong functions, assets and risks⁶. That note is dated May 2016 and describes the law as it stood at publication⁶; the concession below is a later rule⁷. The current salaries tax concession excludes a percentage of eligible carried interest from a qualifying employee’s salaries tax, for carried interest received on or after 1 April 2020, and that percentage is at present 100%⁷. A qualifying employee is one who provides investment management services in Hong Kong for the qualifying person⁷. Eligibility has more conditions than these two lines; the IRD FAQ sets them out⁷. This page does not give tax advice.

Reading the fee terms in a fund document

Start where the money is described. Offering documents and agreements should disclose and govern the fees and expenses of the fund and its investors⁹, and investors should be vigilant about both⁹. ILPA asks that fees, expenses and carry calculations be disclosed regularly, reviewed periodically by the limited partner advisory committee and certified by an independent auditor⁴. In more developed markets funds typically keep such an investor advisory committee¹, and investors often add side letters with extra terms¹.

For reporting, the ILPA Reporting Template standardises how fees, expenses and carried interest are shown⁵. The updated version replaces the 2016 one for funds still investing in the first quarter of 2026 and for funds starting on or after 1 January 2026⁵. In the 2021 survey, 59% of LPs said the standard ILPA fee template reached them at least half the time³.

The fee study behind much of this page covers 1992 to 2006, and about three-quarters of its funds focused on the United States². The 2021 survey is the current public benchmark found³; no current public benchmark for Asian carry or hurdle rates was found, so those figures stay on the labelled sample. Compare terms against the ILPA standards in ILPA Principles 3.0⁴, and see how GPs and LPs divide the work.

Nothing on this page recommends a fund or a manager or forecasts a return.