Distribution follows a waterfall. Typically limited partners first receive their contributed capital, then a preferred return of around 8%, then the general partner receives a catch-up, after which further profits split 80/20.
Carry is calculated either deal by deal, which pays the manager earlier, or on a whole-fund basis, which pays only after the entire fund is in profit. European-style whole-fund waterfalls are more investor-friendly; deal-by-deal arrangements rely on a clawback provision to recover overpayments at the end of the fund's life, and a clawback is only as good as the entity owing it.
Tax treatment of carry as a capital gain rather than as compensation remains politically contested in several jurisdictions. See hurdle-rate and performance-fee.
Related: hurdle-rate, performance-fee, private-equity, limited-partnership, two-and-twenty, high-water-mark