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

A PE fund has $100 million of LP contributions, an 8% hurdle, a 20% carried interest and a 100% GP catch-up. Assume the hurdle amounts to $20 million of preferred return over the life of the fund, and the fund makes total distributions of $160 million in a whole-fund (European) waterfall. What is the GP carried interest?

The GP receives $12 million. With a full catch-up, once the preferred return is paid the GP is brought to 20% of total profit, so carry equals 20% of the $60 million profit ($160m distributions less $100m contributed capital).

  1. A$12 million
  2. B$20 millionCorrect
  3. C$8 million
  4. D$10 million

Explanation

Total profit is $160m - $100m = $60m. Return of capital $100m, then preferred return $20m to LPs, leaving $40m. With a 100% catch-up the GP receives the next $5m (so it has 20% of $25m profit distributed), then remaining $35m is split 80/20. Hence the GP gets 5 + 7 = $12m, which equals 20% of $60m. Check: 20% x 60 = 12.

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