FRM Part I · FRM Exam Part I · Fund Management
A fund has an 8% hurdle rate with a full catch-up and 20% carried interest, and uses a whole-fund (European) waterfall. LPs contributed $100 million, and the fund distributes a total of $180 million at the end of the life, with the hurdle (preferred return) amount equal to $30 million. Ignoring fees, how much carried interest does the general partner receive?
The general partner receives $16 million. With a full catch-up and enough profit, carry equals 20% of total profit, which is $80 million after returning the $100 million of contributions. The hurdle only delays when the GP is paid; it does not reduce carry once the catch-up is complete.
- A$16 millionCorrect
- B$14 million
- C$20 million
- D$10 million
Explanation
Total profit = 180 - 100 = $80 million. With full catch-up, the GP receives 20% of all profit once the catch-up is complete, provided profit is sufficient: 0.20 x 80 = $16 million. Check: LPs get 100 + 30 = 130, GP catches up 7.5 (to 20% of 37.5), then the remaining 50 splits 80/20, giving GP 10 + 7.5 = 17.5? Recompute: catch-up lets GP receive 100% until GP = 20% of (30 + GP), so GP = 7.5; remaining 180 - 130 - 7.5 = 42.5 split 80/20 gives GP 8.5; total 16. $14 million is 20% of 70 (ignoring part of profit). $20 million is 20% of the $100 million contribution. $10 million is 20% of 50.
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