How Carried Interest Actually Works in Private Credit

A candidate who has only ever priced buyout carry brings a specific model into a credit interview: a large pool, an 8% hurdle that a strong fund clears by miles, and a payout that arrives once, at exit. Every piece of that model is built for an equity stake sold years from now for more than it cost.

A credit fund lends money and gets repaid on a schedule. Its carry is smaller before anyone talks about performance, its hurdle is lower but harder to clear by a wide margin, its fee is charged on different capital, and a good chunk of the return it is measured against comes from leverage rather than from the underlying loan book. Import the buyout model and every one of those differences reads as a rounding error. None of them is.

15%

most common credit incentive fee

against buyout's 20%, Callan 2023

5%–7%

typical credit hurdle

against ~8% for buyout, Goodwin 2023

2:1

maximum BDC leverage

debt-to-equity, since the 2018 SBCAA reform

quarterly

how often an evergreen fund tests its hurdle

against a drawdown fund's realisation-only test

The fee shape: 1 and 15, not 2 and 20

The two-and-twenty convention is a buyout invention, and credit funds have never fully adopted it. Three named, disclosed-methodology surveys converge on a smaller shape:

• Callan's 2023 study of 330 private credit partnerships found fees had evolved to a median of 1.5% management and 15% carry, with 15% the single most common carry figure across more than a third of the funds studied.
• Cliffwater's 2024 survey of 66 direct lending managers, running $1.1 trillion between them, put the average management fee at 1.10%.
• Cliffwater's earlier fee study found average incentive fees of 13.1%, with 10% and 15% the two most frequently used numbers.

Preqin's own fee data tells the same story from a different angle: private debt carries the lowest average management fee of any major private capital asset class, at 1.40% during the investment period, against 1.81% for private equity and 2.15% for venture capital.

What a smaller pool means before anyone talks about a hurdle

Fifteen percent of a dollar of profit is a quarter less carry than twenty percent of that same dollar. That gap exists before a single hurdle, catch-up or vesting schedule is applied.

A credit fund's investment team is splitting a structurally smaller pool than a buyout team splitting the profit on the same size of fund. It is the first and simplest reason credit compensation research keeps finding smaller long-term incentive figures than buyout benchmarks, independent of anything about performance.

The hurdle is the point

Credit funds set their preferred return lower than buyout does. Goodwin's own database of private fund terms puts nearly 80% of private equity funds at an 8% hurdle, while credit funds typically sit between 5% and 7%. Callan's median across its 330-fund dataset lands at 6% to 7%, and Cliffwater's average sits at 6.1%. Three independently disclosed sources agree closely enough that the range is no longer really in doubt.

A lower number sounds like an easier bar. It is not, once it is read against the return it actually has to clear.

Why a narrower return makes the same-size pref bite harder

Adams Street Partners put unlevered senior secured lending yields at roughly 12% by early 2023, up sharply from 5% to 6% in mid-2021 as rates and spreads widened. Add the modest boost from buying at a discount, plus fund-level leverage, and a levered fund lands at a gross IRR of roughly 14% to 15%. Set against a 6% to 7% hurdle, that is only about double.

Buyout looks similar on the surface: an 18% median net return for 2008-to-2018 vintage funds against an 8% hurdle is also roughly double. The number that breaks the comparison is dispersion, not the multiple.

Adams Street states plainly that private credit return dispersion has historically run lower than private equity's, and it is not a subtle gap. A buyout fund's median outcome sits inside a wide scatter of results, so the funds that actually pay meaningful carry are the ones that landed well above that median, clearing the hurdle by a wide margin.

A credit fund's outcomes cluster far more tightly around that 14% to 15% figure. A much larger share of a typical fund's actual profit sits inside the narrow band between the hurdle and the fund's ordinary result, rather than in a fat tail above it.

That is the honest version of what a lower hurdle buys a credit investment team: a bar that is easier to clear on paper and harder to clear by a comfortable margin in practice, because there is less daylight above it to begin with.

What that does to the expected value of carry

No fund-terms database publishes a precise dollar figure for how much of a credit fund's carry the hurdle actually removes relative to a buyout fund's, and this piece will not invent one. What the sourced pieces support is the mechanism: a smaller pool, split against a return that clusters close to its own hurdle, produces a thinner and more consistent carry outcome than a larger pool split against a return whose whole value comes from its right tail.

That has a practical consequence worth sitting with. Buyout carry behaves like a call option on a small number of exceptional outcomes, which is why it can be transformative for the people who hold it and worthless for the people at funds that never get there.

Credit carry behaves more like a modest, recurring top-up on a return that was already going to be decent, because the loan book was underwriting decently. Neither is better in the abstract. They are different bets, and a candidate weighing an offer against a buyout benchmark is comparing a lottery ticket to an annuity and calling the smaller number a worse deal.

Invested capital, not committed capital

Private equity convention charges the management fee on committed capital during the investment period, whether or not that capital has actually been put to work. Preqin's data shows 95.9% of private equity funds still do this. Private credit runs the other way: 57.5% of private debt funds base their fee on capital that is actually invested, with only 23.3% charging on the initial commitment.

Two separate surveys actually disagree on how universal this is. Cliffwater's narrower sample of 49 large direct lending managers found all 49 charging on invested assets, a stronger tilt than Preqin's broader population shows. Both figures are real; they simply describe different slices of the market, and the honest reading is that invested-capital fees are the clear majority convention in credit rather than a universal one.

Macfarlanes' modelling of a typical direct lending fund confirms the mechanism: roughly 1% on net invested capital, falling as loans are repaid rather than staying fixed against the original commitment. Dechert's review of fee-base design calls the invested-capital model increasingly the standard approach for private credit specifically, and notes that unfunded commitments typically carry no fee at all under it.

Why this distinction matters more in credit than in buyout

A private equity stake, once bought, tends to sit on the books largely unchanged until an exit years later. A loan does not sit still. It amortises, gets refinanced, gets repaid early, and the capital that comes back has to be redeployed or returned.

Charging the fee on committed capital in that environment would pay a manager for money doing nothing during a slow quarter of deployment. Charging it on invested capital ties compensation to capital that is actually earning interest — which is also precisely why the earliest years of a fund's life, when a team is doing the most origination work and has the least capital actually deployed, generate the thinnest fee income of the fund's whole life.

The leverage that turns a lending yield into an equity return

A senior secured loan yielding low double digits is a respectable but unremarkable return on its own. What turns that yield into something worth calculating carry against is leverage applied at the fund level, and the ceiling on how much of it a fund can use is a matter of specific regulation, not convention.

• Before 2018, a business development company had to maintain 200% asset coverage under the Investment Company Act — roughly a 1:1 debt-to-equity ceiling.
• The Small Business Credit Availability Act cut that requirement to 150% asset coverage for BDCs that obtain board or shareholder approval — roughly a 2:1 ratio, doubling the leverage a BDC is permitted to run.
• A private, non-BDC commingled fund typically stays closer to 1:1 rather than pushing to the BDC ceiling.

What leverage does to the carry calculation, and to the downside

Adams Street Partners modelled this directly on a direct lending portfolio. On a loss-free book, an unlevered yield of roughly 10.8% becomes about 13.1% at 1:1 leverage and about 15.4% at 2:1 — the mechanism that pushes a fund's return comfortably clear of its 6% to 7% hurdle, since incentive fees are calculated on the levered, fund-level return rather than the raw asset yield.

The same modelling shows what happens once losses appear. On a portfolio carrying cumulative defaults of 20% to 25%, 1:1 leverage drags the yield down to somewhere between 2.2% and 9.1% depending on the recovery rate achieved. At 2:1 leverage, that same stress produces a range of 0.0% to 9.4%.

Leverage does not just add a fixed boost to the good case. It widens the range on both sides of the hurdle, and the bad case gets wider by more than the good case gets better.

Unlevered

10.8%

1:1 leverage

13.1%

2:1 leverage (BDC ceiling)

15.4%

Modelled on a direct lending portfolio. Higher leverage lifts the loss-free case further above the typical 6–7% credit hurdle, but the same leverage widens the range of outcomes once defaults appear.

A carry calculation that looks at the good case alone is only reading half of what leverage does. The same lever that makes the hurdle easy to clear in a strong year is the reason a weak year can miss it by more than an unlevered fund ever would.

European waterfall against American waterfall

Buyout funds most often run an American, deal-by-deal waterfall, calculating and paying carry investment by investment as each one is sold. Credit funds lean the other way.

Cleary Gottlieb's review of private credit fund terms finds credit skewing toward a European, whole-of-fund waterfall, in part because credit holdings tend to be more liquid than a private equity stake. Callan's larger dataset independently agrees: a majority of its 330 funds run a European structure, with just under a quarter using American, hybrid or other approaches.

The exception runs in a specific direction. Illiquid credit strategies, special situations named specifically, are trending back toward the American structure a buyout fund would recognise, because their holding periods and realisation patterns look more like private equity's than like a diversified loan book's.

A drawdown fund's carry

• Tested at realisation or fund-level distribution
• A weak early year can be offset by strong later ones
• Waterfall runs once, over a fixed fund life
• Some direct lending funds add a separate current-income variant

An evergreen fund's carry

• Tested against net asset value, often quarterly
• A weak quarter shows up in that period's hurdle test immediately
• No fixed end date to average performance across
• Eligibility can start and stop with the NAV trend

A subset of direct lending funds go a step further, running a separate current-income waterfall that lets carry accrue against the interest a loan book throws off each quarter, closer in spirit to a BDC's own distribution mechanics than to a classic private equity structure.

Evergreen funds pay carry on a different clock

Drawdown funds and evergreen funds are converging fast in scale. Direct lending is now the single largest strategy inside the roughly $535 billion US evergreen fund universe, and business development company assets inside that universe grew more than 31% in a single year through year-end 2025. The structure is no longer a niche variant.

Loyens & Loeff's structuring guide draws the fee-timing distinction plainly. A vintage, closed-end fund runs what it calls a classic carried interest waterfall, tied to realisations across the fund's fixed life. A NAV-based evergreen fund works differently: the manager generally becomes eligible for a performance fee once the fund's returns, assessed against periodic net asset value, exceed the fund's preferred return, rather than waiting on any single realisation event.

How crystallisation timing diverges from a drawdown fund

That periodic test cuts in both directions. In a good stretch, an evergreen structure can start paying a performance fee earlier than a drawdown fund ever would, because it does not have to wait for a loan to actually be repaid before checking whether the hurdle is cleared.

In a weak stretch, the same structure can lose that eligibility just as quickly, because the test resets against a NAV that just moved against it, rather than being smoothed out by years still to come in a fixed fund life.

Retail-facing evergreen vehicles add a further practical wrinkle on the investor side rather than the manager side: interval funds and non-traded business development companies typically offer a recurring liquidity window of only 5% to 25% of fund NAV per quarter, so redemption and performance-fee crystallisation are running on related but separate clocks inside the same structure.

What a junior actually gets, and when

Here the honest answer is thinner than the mechanism sections above, and it should stay that way rather than be padded out with an invented figure. The most disclosed, named survey of private credit compensation available starts at Vice President. Nothing below that level has been measured by any survey with a published methodology, for carry or for anything else, in this asset class specifically.

What can be said with some confidence is why that gap exists, from the mechanics already established. A carry pool that is roughly a quarter smaller than buyout's, split among senior investment staff, has less to extend down the seniority ladder than a larger pool does.

A fee base tied to invested capital means the earliest years of a fund's life, exactly when the most junior people are doing the heaviest origination work, generate the least fee income to fund anything with.

Where carry does show up, it typically vests over five years, with three years more common only at the most senior level — a poor fit for anyone not expected to stay that long.

• Vesting. Five years is the most common schedule; three years shows up mainly for the most senior holders.
• Deferred bonus. Common above the most junior level, typically 20% to 30% of total bonus.
• Clawbacks. Rare across the funds surveyed.
• Management-company equity, a direct stake in the manager rather than in any single fund, is explicitly uncommon at any level.

None of that adds up to a number a junior candidate should walk into an interview expecting. It adds up to a mechanism worth understanding instead: carry in credit is structurally a senior instrument, for reasons that follow directly from a smaller pool, a fee base tied to deployment, and a vesting schedule built for people who stay.

The bottom line

Every difference in this piece traces back to the same starting fact: a credit fund gets repaid on a schedule instead of at an exit, and its economics were built around that schedule rather than borrowed from a business that works differently.

The pool is smaller because the fee convention is smaller. The hurdle is lower but bites harder, because the return it measures sits close to it with little room to spare. The fee is charged on capital actually at work rather than capital merely promised, because credit capital does not sit still the way an equity stake does.

Leverage, not the underlying loan book alone, is what makes the return worth calculating carry on in the first place, and it leverages the bad years exactly as faithfully as the good ones. An evergreen structure tests all of this more often and less forgivingly than a drawdown fund ever has to.

None of it is a smaller version of buyout carry. Read alongside the survey data on who actually holds carry and when it turns into cash in private credit compensation, and against the deal mechanics in private credit interview questions, the case for treating credit as its own asset class rather than a discount version of private equity gets stronger with every mechanism, not weaker.