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

An LP commits $100 million to a buyout fund with an 8% preferred return, 20% carried interest and a 100% GP catch-up, using a whole-fund (European) waterfall. Capital is returned after exactly 1 year of total hold in a single distribution, and total distributions are $130 million (profit $30 million). Ignoring management fees and compounding beyond the one year, how much carried interest does the GP receive?

The GP receives $6.0 million. With the 8% hurdle met and a full catch-up, the GP ends with 20% of total profit, which is 20% of $30 million. The distractors ignore the catch-up or apply carry only above the hurdle.

  1. A$6.0 millionCorrect
  2. B$4.4 million
  3. C$5.6 million
  4. D$8.0 million

Explanation

Return of capital: $100m. Preferred return: 8% x 100 = $8m to LP. Catch-up at 100% to GP until GP has 20% of total profit: 20% x 30 = $6m, requiring $6m of the remaining $22m profit, which is sufficient. Remaining $16m split 80/20: GP gets 3.2, but total GP carry is capped at 20% of profit = $6m after catch-up, since the catch-up brings GP to 20% of profit distributed so far (8+6=14 gives 6/14 = 43%, not 20%). Correct catch-up: GP needs 20% of (8 + x), so x = 2m; then split remainder 80/20. Total GP = 2 + 0.2 x 20 = 6.0m, which equals 20% of 30.

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