Beruflich Dokumente
Kultur Dokumente
13:
Distribution Waterfall
Importance of the Waterfall Distribution
General Partner Incentive Structure
Profits and Carried Interest
Distribution of Profits
General Waterfall Distribution
Breakeven IRR
Preferred Return as a Free Option
Clawbacks
LO 2.48
LO 2.49
LO 2.52
Distribution of Profits
ah =
Cn (1 + h)T ? t
n=1
h?u
u?c
189
LO 2.52
LO 2.52
10% 100%
= 12.5%
100% 20%
191
LO 2.52
GP
Total
Return of capital
Preferred return
to LP
ah d
ah d
Catch-up for GP
(1 u)x
u(x)
80/20 split or
residual
(1 c)y
c(y)
Closing balance
Sum of
above
Sum of
above
ad
193
LO 2.52
194
LO 2.52
GP
Total
100
$100M
110 100 = 10
$10M
Catch-up for
(1 0.5)(6.67) = 3.335
GP
0.5(6.67) = 3.335
$6.67M
80/20 split or
residual
0.80(50 16.67) =
26.66
0.20(50 16.67) =
6.67
$33.33M
$140M
$10M
$150M
Closing
balance
195
LO 2.53
Breakeven IRR
Fund A: 100% catch-up, 20% carried
interest, and hurdle rate of 8%
Fund B: 40% catch-up, 20% carried interest,
and hurdle rate of 6%
Fund A =
8% 100%
= 10%
100% 20%
Fund B =
6% 40%
= 12%
40% 20%
IRR
Return Fund A
(hurdle rate = 8%)
Return Fund B
(hurdle rate = 10%)
6%
0%
20%
8%
20%
20%
10%
20%
12%
20%
196
LO 2.54
LO 2.56
Clawbacks
Provisions in partnership agreement
Ensures equitable final distribution (carried
interest split)
Example:
Asset X (purchased for $170M) is sold for
$200M in Year 1. Asset Y (purchased for
$30M) is sold for $10M in Year 2. 80/20
carried interest split with 10% hurdle rate.
Determine the carried interest at the end of
Year 1 and 2 and the clawback, if any
198
LO 2.56
Clawbacks (continued)
End of Year 1 (carried interest):
(20%) ($30M) = $6M to managers
$30M $6M = $24M to investors
End of Year 2 (no carried interest):
$20M loss accrues to limited partners
Termination of the fund:
Hurdle rate: $200M 1.12 = $242M
Limited partners: $170M + $24M + $10M =
$204M
Clawback: $242M $204M = $38M
199
LO 2.57
Clawback Limitations
Unenforceable if the fund does not contain
liquid assets
Payment is based on the general partners
creditworthiness
General partner may extend the life of the
fund to delay
Practical limitations of litigation
200