How is carried interest calculated?

Answer 1

Before we answer that, let us make the following assumptions.

a) Investors have put in 100 Mill $

b) 10% p.a. Hurdle Rate

c) 20% Carried interest (catch up)

d) 80:20 Share after the carried interest

Suppose the fund started with 100 Million $ and end of the year it is liquidated and made 200 Million $ i.e 100 Million $ of Profit. The distribution is as follows:

a) First the investor gets paid his capital from the 200 Million i.e. 100 Mill is paid out.

b) Next 10% return out of the Profit (200-100) is paid. In this case 10 million (100*10%). This leaves 90 Million $ available.

c) 20% carried interest is then paid. i.e 20% on 100 Million profit= 20 Million (Some calculate it 20% on 90 Million i.e after the hurdle=18 Million)

d) This leave 100-10-20= 70 Million profit.

e) This is then share 80:20 between investors and mgt. i.e 56:14

To summarize:

LP investors get for the $100 Million investment = 100+10+56=166 Million.

Mgt gets for their effort = 20+14=34 Million.