Carried interest ("carry") is the GP's share of profits above a hurdle rate. It is the primary upside compensation for MCA fund managers and the mechanism that aligns the GP's incentives with LP returns. As of 2026-06-28, MCA carry has stabilized at the PE-standard 20% of profits but with stricter waterfall mechanics, lower hurdle rates, and harsher tax treatment than buyout PE.
The standard structure.
A representative 2026 MCA fund carry term:
- Carry rate: 20% of profits.
- Hurdle (preferred return): 7%–9% annualized to LPs.
- Catch-up: Full GP catch-up after hurdle is satisfied.
- Waterfall type: European (whole-fund basis).
- Clawback: Full clawback at fund liquidation if total LP return falls below the preferred return.
The European waterfall — how the math actually flows.
For a $200M fund returning $310M ($110M profit):
- Return of capital to LPs. $196M LP contributions returned.
- Return of capital to GP. $4M GP commitment returned.
- Preferred return to LPs. 8% annualized compounded on LP contributions; cumulatively ~$60M over the fund life.
- GP catch-up. GP receives 100% of distributions until the cumulative profit split is 80% LP / 20% GP. On the $60M preferred return paid, GP catches up with $15M (so cumulative split = $60M LP, $15M GP = 80/20 of the first $75M of profits).
- 80/20 split of remaining profits. Remaining $35M of profit split: $28M LP, $7M GP.
- Total to LPs: $196M + $60M + $28M = $284M (a 1.45x multiple).
- Total to GP: $4M + $15M + $7M = $26M, of which $22M is carry.
Why MCA carry is taxed as ordinary income.
In buyout PE, carry can qualify for long-term capital gains rates (currently 20% federal plus 3.8% NIIT, total 23.8%) because the underlying assets are held >3 years and qualify as capital assets.
MCA deals don't meet either test:
- Holding period. Most MCAs are repaid in 6–12 months — well below the 3-year holding requirement (extended from 1 year for carry under TCJA 2017).
- Asset character. MCAs are commercial receivables, treated as ordinary-income-generating assets, not capital assets.
Result: MCA fund carry is taxed at the GP's ordinary income rate (37% federal top bracket plus state). On $22M of carry, GPs may pay $9M+ in taxes vs. $5M+ if it qualified for capital gains treatment.
This tax inefficiency is why some MCA GPs structure parallel "loan funds" or use bond-like structures to qualify for better tax treatment — though IRS scrutiny of these structures has tightened since 2024.
Hurdle rates — why 7–9% vs. PE's 8%.
- Lower hurdle (7%). Reflects MCA's short duration and immediate cash yield — LPs accept a lower hurdle because they're getting paid quarterly, not waiting 5–7 years.
- Higher hurdle (9%). Reflects LP fee pressure and the availability of comparable yield in BDCs and direct syndication.
- Median MCA hurdle in 2026: 8%, with a clear trend toward 7% for top-tier GPs and 9% for newer managers raising first or second funds.
Catch-up — full vs. partial.
- Full catch-up (100% to GP after hurdle): Standard. GP receives all distributions until the 80/20 split is achieved on a cumulative basis.
- 50/50 catch-up: Less common; GP receives 50% of distributions until 80/20 is reached.
- No catch-up: Rare; would mean the GP only gets 20% of profits above the hurdle (significantly worse for GP).
The catch-up mechanic ensures that once the LPs get their preferred return, the GP doesn't lose its 20% share of "the first dollar of true profit."
Clawback provisions.
Full clawback is standard in MCA funds. If the fund returns $310M total but $80M is from early winners (paying $16M of early carry) and the back half loses money (final total $310M = $284M LP + $26M GP), the GP doesn't owe anything back because the LPs hit their preferred return.
If the fund underperformed (e.g., $260M total return = $196M LP capital + $4M GP capital + $60M of which $48M goes to LP preferred and $12M would be split), and the GP had already collected $20M in interim carry distributions, the GP would owe $17M back to the fund via clawback.
Clawback amounts are usually held in escrow during the fund life (5–25% of paid carry) to ensure availability at liquidation.
Carry distribution mechanics.
- Accrued but not paid: Carry accrues on each realization but is held back until the preferred return is fully satisfied (typically years 3–5).
- Interim distributions: Once preferred return is met, carry is distributed alongside LP distributions on each realization event.
- Final true-up: At fund liquidation, the full waterfall is recomputed and any overpayment of carry triggers clawback.
The "deal-by-deal" alternative (American waterfall).
Some early-2010s MCA funds used American waterfalls (carry paid per deal as it realizes), but this structure has fallen out of favor:
- LP risk. Early deals may pay carry that gets clawed back later — operational headache.
- GP cash flow benefit. GP gets carry sooner — significant tax and capital-cost advantage.
- 2026 prevalence: <10% of MCA funds use American waterfall; mostly small, founder-led platforms.
Common confusions.
First, "Carry is the GP's salary." False — carry is upside compensation, only paid when LPs are made whole and earn their preferred return. GP partners take modest salaries (often $300K–$600K) from management fees; carry is the potential payday.
Second, "All carry is taxed at long-term capital gains rates." False, especially for MCA — most MCA fund carry is taxed as ordinary income because the assets don't qualify for LTCG treatment.
Third, "20% carry is industry standard and not negotiable." Increasingly false — large LPs negotiate 15% carry on commitments above $100M, or tiered carry (15% below threshold, 25% above) aligning GP upside with differentiated returns.
The 2026 takeaway. Carry is what makes MCA fund GPs care about LP outcomes. Full clawback, European waterfall, and ordinary-income tax treatment mean MCA GPs work hard for their carry — and funds delivering above-hurdle returns raise larger successor funds.
Related terms
- MCA funder management fee (typical) — Standard MCA fund management fees in 2026 are 1.5–2.0% of committed capital during the investment period, stepping down to 1.0–1.5% of invested capital during the harvest period — lower than buyout PE because MCA assets are short-duration.
- MCA funder LP/GP economics — LPs (Limited Partners) supply ~98% of MCA fund capital and earn a preferred return (7–9%) plus 80% of profits above the hurdle; GPs (General Partners) supply 1–3% but earn 20% carried interest plus management fees.
- MCA funder fund structure (typical) — MCA capital is typically held in a Delaware LP with a GP entity, 8–10 year fund life, $50M–$500M committed capital, levered 2–4x via warehouse facilities, targeting net IRR of 12–18% to LPs.
- MCA funder fund vintage impact — Fund vintage (the year capital was first deployed) materially affects MCA fund returns: 2020–2021 vintages benefited from COVID stimulus tailwinds; 2024–2025 vintages face tighter credit and higher defaults; 2026 vintages are positioned for the next cycle peak.
Authoritative sources
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