The below was from a modelling test:
Assume the General Partner will receive carried interest at exit as follows:
o First, one hundred percent (100%) to the Ordinary Unitholders until each Ordinary Unitholder
has received a twelve percent (12%) IRR;
o Second, fifty percent (50%) to the General Partner until the General Partner has received fifteen percent (15%) of the total net cashflow.
o Thereafter, to the General Partner, an amount equal to fifteen percent (15%).
There is no mention of GP/LP equity splits so I would assume 0 equity contribution from the GP.
My understanding of the first bullet is that is the LP's pref which is standard.
I read the second bullet as the GP receiving 50% of all cash flow up to 15% IRR? Is that correct?
The final bullet I understand as 15% of all cash flow to the GP above a 15% IRR. Is that correct?
This (the 15% after the 12%) is a GP catchup. Uncommon in most RE waterfalls (more common w institutions).
In simple terms, it’s 100% return of capital, 100% pref, then 100% to the GP until they hit a 15%, then 85/15 LP/GP split thereafter.
Not “until they hit a 15”, it’s “until they hit 15% of the total cash flow to this point”
Do you mean 50% to the GP until they hit a 15%?
Went back and re-read. Yes, that’s correct. 50/50 to a 15.
The way I read it is
First - 100% to the LP until they get a 12% IRR
Second - 50% to GP and 50% to LP until the GP % of total distributions made = 15% (catch up)
Third - 15% to GP / 85% to LP Thereafter
OP, this is the answer, except I'd qualify 15% as of net cashflow instead total distributions to exclude any effect from hurdle I. Mentioned assuming GP doesn't contribute, so there can't be any IRR hurdle for them, as anything they get is all gravy (infinite% IRR). Key point being that net cashflow produced by the asset needs 15% sent to GP at the end of hurdle II - I would say regardless of any distributions under hurdle I (if there's not enough cashflow to cover both, hurdle II never gets passed).
The GP catchup isn’t described clearly. Is it 15% of all distributions made up to this point? Or 15% of the pref? Or 15% of all distributions in the entire waterfall?
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