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FRM Part II · FRM Exam Part II · Private Markets Investing

A buyout fund has an 8% annual hurdle rate, a 100% GP catch-up, and 20% carried interest, with a European (whole-fund) waterfall. LPs contributed 100 million, and total distributions over the fund's life are 190 million. Assume for simplicity the hurdle amounts to a cumulative preferred return of 40 million. What is the GP's carried interest?

The GP earns 18 million. Total profit is 90 million, and with a full catch-up after the hurdle is cleared, the GP receives 20% of total profit rather than only 20% of the excess over the hurdle. The 50 million left after pref and capital is enough to fund the full catch-up.

  1. A18 millionCorrect
  2. B20 million
  3. C10 million
  4. D16 million

Explanation

Total profit = 190 - 100 = 90 million. After returning capital (100) and the pref (40), 50 million remains. With a full catch-up, the GP receives 100% until it holds 20% of total profit: 20% x 90 = 18 million, which needs 18 million of catch-up, and 50 is enough. The 20 million option applies carry to 100 million, which is wrong; 10 million is 20% of the 50 million after the hurdle only.

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