Demystifying Carried Interest Calc
WSO Community,
Hope everyone here is doing well. I'm looking to get a second opinion on my calculation of potential carry (picture of my calculation attached). Here, I'm assuming the following:
LP Commitment: Assumed to be 95% of total fund (i.e., $475M of $500M fund)
Management fee: 1% of commitments during commitment period and 1% of invested post-commitment period
Commitment period: 4 years
Preferred return: 8%
Carried interest: 12%
My portion of carry: 5%
*This is a FoF
For simplicity, I'm assuming capital calls occur over Q2 2022 through Q1 2026 (i.e., $31M per quarter). In my chicken scratch worksheet, distributions reflect a 2.0x gross return on capital calls after 4 years. I'm not assuming any catch-up.
Based on this, I'm arriving at a ~$731K for my total carry - any thoughts on whether this is in the ball park would be much appreciated.
P.S. Apologies for not sharing the full worksheet, but just wary of any identifying file properties / attributes.
| Attachment | Size |
|---|---|
| Carry Worksheet 47.1 KB | 47.1 KB |
Please don't make people audit your chicken scratch using a screenshot rather than the excel...
On first impression, your management fee is 4x too high (looks like you calculated it quarterly rather than annually) and your pref is also off? As a sanity check, your pref is 8% and your net IRR is 20% so how is your excess return less than the accrued pref?
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Are the management fees set up for your fund as LP commitment plus management fees on top? I know this is possible but haven't seen it very often. Otherwise, the $475m LP commitment would be inclusive of management fees. That way you would only return the $475m + preferred hard hurdle (in this case) before sharing in the carry.
Never seen a FoF charge 12% carry - sounds outrageous. Usually FoFs charge 0% carry or 5% carry. If they do secondaries they often charge just 10% on the secondaries or co-invest portions.
For simplicity let's just assume the fund size is 500m and all capital is called and the IRR ends up being in the money and it's a 2x return:
500 x 2 = 1000
1000 - 500 = 500 profit
500 * 0.12 = 60 carry to GP
60 * 0.05 = 3m to you
Could take you a long time to get that money though...
OP mentions not assuming any catchup, not sure if that is for simplicity or whether that is the carry waterfall. If there is no catch up then the 8% preferred return makes it slightly harder to do the back of the envelope.
So the actual carry number would be at most what you have calculated.
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