A performance fee is pay contingent on achieving investment returns— in venture capital, the GP’s carried interest share of fund profits.

How it works

Typical VC funds charge ~2% management fee on commitments and ~20% carry on gains after returning LP contributed capital (and sometimes a preferred return hurdle). Carry is the performance fee: no exit gains, no carry. Some structures tier carry at higher return thresholds. Hedge funds and private credit use different performance fee models, often with high-water marks.

GPs distribute carry to partners per internal agreements; vesting of carry rights affects partner retention. LPs scrutinize fee offsets—whether transaction fees reduce management fee—and carry clawbacks if early markups reverse.

European and U.S. funds may differ in hurdle and catch-up mechanics, but the performance fee concept is the same: align GP upside with LP profits after capital return. Founders rarely negotiate carry, but they feel it when GPs push for exit timing that clears LP hurdles and fund life extensions.

Carried interest vesting for junior partners affects who stays through long holds. Founders benefit when stable deal teams shepherd the company from entry to exit rather than rotating after carry cliffs.

Why it matters

• Founders: GP support through IPO or sale partly reflects carry economics—large outcomes matter to the partnership, not just management fees.
• Investors / LPs: Performance fee terms define alignment. Lower carry or hurdle changes GP incentive but may attract different manager quality.

Common mistake

Calling management fee a performance fee. Management fee pays operating the firm regardless of returns; carry is the true performance-linked component.

Related ideas

See carried interest, management fee, hurdle rate, and waterfall in fund distributions.