Carry crystallization is the process of calculating and realizing a GP's accrued carried interest on assets being transferred out of an existing fund. It is most commonly triggered when portfolio companies move into a continuation vehicle, forcing a determination of how much carry the GP has earned on those assets up to the transfer date.
Why It Matters
Carry crystallization determines how GP economics transition from the old fund to the new vehicle. The approach the GP takes directly affects alignment with incoming secondary buyers and rolling LPs. A GP that locks in carry at the time of transfer starts the new vehicle with a clean slate but collects economics today. A GP that defers carry into the new vehicle signals stronger alignment with the future performance of the assets.
Key Details
- Full crystallization: The GP receives all accrued carry at the time of transfer. The new vehicle starts with no legacy carry obligation, and the GP earns carry on future appreciation only.
- Partial crystallization: The GP takes a portion of accrued carry at transfer and defers the remainder into the new vehicle.
- Full rollover: The GP defers all accrued carry into the new vehicle, earning it only when the assets are ultimately realized. This approach signals maximum alignment with new investors.
- Crystallization mechanics interact with GP clawback provisions in the original fund, since carry paid out at transfer may be subject to clawback if the remaining fund underperforms.
- Tax treatment varies by crystallization method. For more on the tax side, see Carried Interest Taxation.
For a full overview, see the Continuation Vehicles guide.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation. Capital Company is not a law firm and does not provide legal advice.