🎉 Happy Friday, Funds Family!

About three weeks ago, we kicked off our first-ever ✅ State of the Market series—starting with a pulse check on overall market sentiment, LP check size trends, and allocation priorities.

Let’s do a quick recap of where we’ve been so far:

• ✅ Part 1: Market sentiment, average check sizes, and capital allocation shifts.

• ✅ Part 2: How GPs are structuring management fees, both pre- and post-investment period.

• ✅ Part 3: Additional fees beyond management fees—what GPs are charging and how these fees vary across asset classes.

In this final Part 4, we’re diving into preferred returns and carried interest structures.

Let’s get into what the data showed👇

📈 Preferred Return: Still Standard for Most

We asked GPs whether their carried interest structure includes a preferred return.

Here’s what they told us:

• 23% do not use a preferred return

• 77% do include a preferred return

💡 Just over three-quarters of GPs reported using a preferred return in their carried interest structure.

As a reminder, just over 50 % of GP respondents in our survey focus on real estate. These results could look very different, for example, with more venture‑capital representation—where LP preferred returns are rare.

📊 Preferred Return Rates: 8% is the Sweet Spot

Among GPs who include a preferred return in their carried interest structure, most are sticking with familiar territory, and the data shows a clear center of gravity.

Here’s how the numbers break down:

• 68% set the preferred return between 7%–8%

• 19% opt for a higher range of 9%–10%

• 6% go with 5%–6%

• 5% offer 11% or more

• Just 2% use a preferred return below 5%

💡 According to the results, the 7–8% range dominates the landscape. This is consistent with what we see in practice, with 8% being the most common return rate.

Of course, there are variations depending on the asset class. For example, in real estate, the rate can be anywhere from 6% to 12%, with lower preferred returns for “core” (lower risk) funds and higher preferred returns for “opportunistic” (higher risk) funds. Value-add strategies typically use a rate around 8%.

🔍️ Multiple Tiers of Carry: Still a Minority Move

We asked GPs whether they use multiple tiers of carried interest—a structure where the carry percentage changes as certain return hurdles are cleared.

Here’s what we found:

• 73% stick with a single-tier carry structure

• 27% implement a multi-tiered carry structure

💡 While most GPs are keeping it simple with a flat carry rate, just over a quarter are layering in performance-based incentives. These multi-tier structures are more common in funds aiming to align upside with outperformance, especially in private equity and opportunistic real estate strategies.

🟠 Single-Tier Carry: 80/20 Dominates

For funds using a single-tier carry structure, the classic 80/20 split continues to lead the pack.

Here’s how it breaks down:

• 56% use an 80/20 structure

• 24% go with 70/30, giving GPs a bit more upside

• 11% opt for a more GP-favorable 60/40

• 4% use either 85/15 or 90/10, which are very LP-favorable terms

💡 The numbers show a strong center of gravity around 80/20, which mirrors what we’re seeing in the wild.

The lower adoption of 85/15 and 90/10 likely reflects how close they are to 80/20, without offering a compelling difference for LPs.

For managers using multi-tier carry structures, we asked how their carry splits are set—both at the fund’s launch and after performance hurdles are cleared.

Here’s how the numbers shook out 👇

🟣 Multiple Tiers of Carry

Let’s start with the initial carry setup at launch:

• 71% begin with an 80/20 split

• 18% go with 70/30

• 12% start at 60/40

💡 Even among funds with tiered structures, 80/20 remains the dominant starting point. Many GPs use this as a baseline before stepping up the economics after meeting return thresholds.

🔄 Final Carry Structure (After Hurdles Are Met)

After launch, GPs using multi-tiered carry often shift their economics once performance milestones are met—and the data shows a clear trend.

Here’s how carry structures change after hitting return hurdles:

• 47% shift to 70/30

• 35% move to 60/40

• Just 18% stick with 80/20 at the top tier

What does this tell us?

💡 While 80/20 is the standard entry point, many GPs choose to reward outperformance with more generous splits. The most common “step-up” model is 70/30, striking a balance between GP incentives and LP alignment.

🪜 Catch-Up Provisions: A Common Feature

We asked GPs whether their fund structures include a catch-up provision—a clause that allows the GP to receive a larger share of profits after the LPs receive their preferred return, until the agreed-upon carry split is reached.

Here’s what they told us:

• 71% include a catch-up provision

• 29% do not include one

💡 Catch-up provisions are the norm among survey respondents, showing up in nearly three-quarters of responses. That largely tracks with what we typically see in practice.

Catch-up provisions are very common (though not ubiquitous) in real estate, private credit, and private equity funds, less common in hedge funds (where there’s sometimes no preferred return), and basically never seen in venture capital funds (which don’t typically have a preferred return).

That’s all for this year’s State of the Market survey. We hope you found the insights helpful, the benchmarks actionable, and the breakdowns (mostly) digestible.

Whether you're structuring your first fund or refining your tenth, we hope this series gave you a clearer picture of where the market is, and where it might be headed.

If there’s a topic you’d like us to dive into next, hit reply or drop us a note. And as always, feel free to share this series with anyone who may find it helpful.

Thanks for reading, everyone.

Have a great weekend! 🙌 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.