General Partner and Investor Perspectives and the Investment Process: formula sheet

Key formulas

GP compensation

GP income = management fee + carried interest (+ return on GP's own co-investment)

Management fee is usually a percentage of committed or invested capital. Carry is a share of profits, often after a hurdle rate.

LP liability

Maximum LP loss = capital committed and drawn (plus any returned amounts subject to clawback or recall)

Limited liability is the reason LPs must stay passive in management.

Unfunded commitment

Unfunded commitment = total commitment − capital called to date

The LP must keep liquidity to meet future capital calls.

Alignment check

Alignment is stronger with: higher GP co-investment, carry after hurdle, clawback, key person clause

Use as a checklist, not a calculation.

Management fee

Fee = fee rate × fee base

The base may be committed capital, invested capital or NAV. Read which one the question states.

Hard hurdle carry

Carry = carry rate × (profit − hurdle amount)

With a hard hurdle and no catch-up, the GP earns carry only on profit above the hurdle.

Soft hurdle with full catch-up

If profit exceeds the point where catch-up completes, Carry = carry rate × total profit

After the hurdle is met, the GP receives distributions until it holds the carry rate share of total profit, then the split continues at the carry rate.

Preferred return amount

Compounding: Hurdle amount = capital × ((1 + hurdle rate)^years − 1). Simple interest: Hurdle amount = capital × hurdle rate × years.

Use the compounding form unless the question says the preferred return is simple interest. Then use capital × hurdle rate × years, as in the worked examples.

Clawback amount

Clawback = carry paid − carry rate × cumulative profit (limited to what the terms require, and often net of tax)

Applies when the carry paid exceeds the entitled amount at fund end. Check the stated cap.

Waterfall order (European)

1) Return of contributed capital and fees; 2) preferred return; 3) catch-up; 4) carry split

Applied to the whole fund before the GP earns carry.

Stage sequence

Sourcing → Screening → Due diligence → Valuation and structuring → Execution (closing) → Monitoring and value creation → Exit

Know the order and the purpose of each stage. This is a framework, not a calculation.

Deal funnel yield

Deals closed ÷ Deals sourced

A simple measure of how selective the process is. A low ratio shows strong filtering but does not by itself prove skill.

Money multiple (for exit review)

Total value to paid-in (TVPI) = (Distributions + Remaining value) ÷ Paid-in capital

Use when an exam asks you to judge the outcome of the process after exit or partial exit.

GP diligence on target: main strands

Commercial + Financial + Legal/Tax + Operational + ESG

Use as a checklist. Commercial tests the market and strategy; financial tests the numbers and quality of earnings.

LP diligence on GP: two parts

Investment due diligence + Operational due diligence (ODD)

Add a review of fund terms and alignment. Investment DD asks whether returns can be repeated; ODD asks whether the firm is controlled and honest.

Red flag response

Finding → size of risk → can it be fixed or priced → proceed, renegotiate, or walk away

Every red flag should end in an action, not just a list.

Money multiple (TVPI)

TVPI = (Distributions + Residual value) ÷ Paid-in capital

Gives total value created per unit of capital paid in. It ignores timing.

Realized multiple (DPI)

DPI = Cumulative distributions ÷ Paid-in capital

Shows cash actually returned. Exits raise DPI.

Residual value to paid-in (RVPI)

RVPI = Residual value ÷ Paid-in capital

TVPI = DPI + RVPI.

Equity value at exit

Equity value = Enterprise value − Net debt

Enterprise value is usually exit multiple × metric, such as EBITDA.

Sources of value creation

Value change = EBITDA growth + Multiple change + Net debt reduction

A simple way to attribute gain to each lever.

Quick revision

• GPs manage the fund and earn fees and carry; LPs supply capital and have limited liability and limited control.
• Management fee compensates the GP for running the fund; carried interest rewards performance.
• LPs must receive the preferred return (hurdle rate) before the GP earns carried interest; with a catch-up, the GP then takes a larger share of subsequent profits until it has its agreed percentage of total profits.
• A catch-up lets the GP receive a larger share of profits after the hurdle until it reaches its agreed profit share.
• A whole-of-fund (European) waterfall returns all contributed capital and the hurdle to LPs before any carry, so it is more LP-friendly; a deal-by-deal (American) waterfall pays carry earlier and so needs clawback protection.
• A clawback makes the GP return excess carry if LPs end up short of their agreed return.
• Key person and removal clauses protect LPs if the team changes or performs badly.
• Co-investment by the GP aligns interests because the GP shares losses.
• The process runs from sourcing and screening to due diligence, structuring, monitoring, value creation and exit.
• Due diligence tests the strategy, team, track record, terms, operations and legal and tax risks.
• Exit routes include sale to a strategic buyer, sale to another fund, public listing and recapitalisation.
• In every answer, link the point to the client's objectives and constraints, including liquidity.

Common mistakes

• Saying LPs manage the fund or vote on individual investments. Fix: Remember that LPs are passive to protect limited liability. They hold governance rights through terms and advisory committees, not deal decisions.
• Treating the GP and LP as having identical goals. Fix: Name the difference: the GP earns fees even when returns are modest, while the LP cares about net returns and liquidity.
• Applying carry to total profit when there is a hard hurdle. Fix: With a hard hurdle, carry applies only to profit above the hurdle. With a soft hurdle and catch-up, the GP can reach carry on all profit.
• Mixing up European and American waterfalls. Fix: Remember European = whole fund, American = deal by deal. Deal-by-deal pays the GP sooner and raises clawback risk.
• Mixing up screening and due diligence. Fix: Screening is quick and checks fit with the mandate. Due diligence is deep, costly verification after a deal passes screening.
• Treating sourcing as passive. Fix: Remember proprietary sourcing through networks and direct outreach. It can reduce competition and improve pricing but needs effort.
• Confusing commercial and financial due diligence. Fix: Commercial = market, competition, customers, growth plan (outlook). Financial = accuracy and quality of earnings, cash flow, debt, working capital (numbers).
• Treating operational due diligence as a review of investment skill. Fix: ODD tests the firm's controls: valuation policy, administrator, cash handling, compliance, cybersecurity, key-person and succession. Strategy and track record are investment diligence.
• Treating multiple expansion as a skill-based lever the GP can control. Fix: Say it depends mostly on market conditions. Growth, margins and debt paydown are more within the GP's control.
• Saying an IPO gives a full and immediate exit. Fix: Note that lock-ups and gradual share sales usually mean the GP exits over time, with price risk.

Exam tips

• Start every answer by stating whose perspective is being asked, then keep to it.
• In fund selection questions, link each factor (team, strategy, terms, track record) to the LP's stated objectives and constraints.
• Alignment terms are favourite exam points: GP co-investment, hurdle, clawback, key person and advisory committee.
• In essays, give exactly the number of responses requested, in order, and keep each to one clear reason.
• Show unfunded commitment or liquidity calculations step by step and type the number with its currency.
• Write the waterfall tiers as a short list in your answer. A correct number alone earns calculation credit, but showing tiers protects you if the number is off.
• When asked to explain alignment, name the term and its effect on who bears risk, for example: clawback returns overpaid carry to LPs.
• For compare questions, give one point per side: European favours LPs, American favours earlier GP payment.