Carry interest and IRR

Dear all,
Hello, i am glad to find here great sepcialists and discuss with them questions.

Currently i' am writing dissertation about investment funds / innovations. I've noticed if IRR higher than hurdle rate, then return splits: 20% to management company and 80% to LP. But here are few questions:

1) Does GP earn carry interest if fund hasn't closed? For example investors returned all cash flows and earned 10% IRR without selling the business. But further returns of the business may fluctuate in that case how we should pay the carry?

2) Some of funds fix hurdle rate to 8% or 10%. How do you think, which one is better to use? Do the PE funds use CAPM or WACC as hurdle rate?

Thank you! : )
P.S. if someone want to write an article with russian student you are welcome
p.s. p.s. the ranking system in WSO from chimp to human especially applicable to Russian students

Comments (4)

 
Aug 15, 2019 - 9:29am

8% is only calculated over invested capital (so never on full fund), not committed by GPs. So if you start with a new fund, there is $0 at 8%.

8% is market practice, it is not related to/calculated with CAPM to my understanding. However I do agree it resembles a 2% rf, beta of 1 and 6% MRP. So it provides pension funds the returns of a fully diversified equities portfolio + upside of exceptional returns in excess of 8%.

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