What is carry paid out on?

There's been some posts on carry points assigned to individual members of a PE fund, but haven't seen anything on what actually is paid in carry or when it's paid. Most (all) funds have a high hurdle rate of 8%, and with a 10 year life of a fund that would mean the fund would have to get to 2.16x (8% compounded over 10 years) until any carry is paid out. Is that the right way to think about it?

I would assume that once you return some money from a sale of a company the 8% stops on the dollars invested in a deal, so that would help lower the 2.16x mark?

Also, when does carry actually get paid out? I would assume the fund wouldn't have to return 2.16x to begin receiving carry distributions? Is there a point when they could pay it out, maybe at 1.0x of capital returned with a belief that the fund will hit the high water mark?

Any advice would be helpful!

Private Equity Interview Course

  • 2,447 questions - 203 PE funds. Crowdsourced from 750k+ members
  • 9 Detailed LBO Modeling Tests and 15+ hours of video solutions.
  • Trusted by over 1,000 aspiring private equity professionals just like you.

Comments (2)

Jan 11, 2020 - 8:41pm

1) to your first question you are correct that the fund would need to surpass its hurdle rate before cary is paid out. On a side note, 8% wouldn't be "high" by industry standards. The caveat is discussed below

2) Unclear of what you mean in your 2nd paragraph. But maybe asnwering the payout mechanics will help. It depends on what agreement is made with LPs and GPs - you can have a deal-by-deal waterfall ("American") or fund waterfall ("European"). Under american, you can collect the carried interest once a deal is realized, given you surpass the hurdle. Usually under american, there is a catch-up provision so that in the event the fund does very well on earlier deals, but completely missess on later deals, the LPs don't end up getting screwed if the aggregate fund return is actually below the hurdle rate. European, the hurdle is calculated on the fund level, so it is likely you wouldn't be getting paid carried interest in earlier deals until you've returned the investors capital + hurdle at a fund level

Start Discussion

Total Avg Compensation

April 2021 Private Equity

  • Principal (7) $694
  • Director/MD (15) $627
  • Vice President (63) $371
  • 3rd+ Year Associate (66) $267
  • 2nd Year Associate (127) $250
  • 1st Year Associate (268) $224
  • 3rd+ Year Analyst (24) $164
  • 2nd Year Analyst (60) $136
  • 1st Year Analyst (172) $117
  • Intern/Summer Associate (18) $71
  • Intern/Summer Analyst (191) $60