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
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%.
Rover - S, thank you very much for your qualified answer. Really appreciate!
"Better to use" depends on if you're a GP or LP - if you're a GP, a low (or no) hurdle is obviously best, but if you're an LP, you want the hurdle to be really high so you pay less in carry.
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