A private equity fund's distribution waterfall includes: (1) return of capital, (2) an 8% preferred return to limited partners, (3) a 100% GP catch-up until the GP has received 20% of total profits distributed so far, and (4) an 80/20 LP/GP split thereafter. If total profit available for distribution (after return of capital) is $50 million, and the preferred return paid to LPs is $8 million, what is the total carried interest (GP's total share) once the waterfall is complete?
- A$8,000,000
- B$12,000,000
- C$16,000,000
- D$10,000,000
Show answer & explanationAnswer & explanation
Correct answer: D. $10,000,000
After the $8M preferred return, let X be the GP catch-up such that X/(8+X) = 20%. Solving: X = 0.20(8+X) → 0.8X = 1.6 → X = $2M. Remaining profit = $50M − $8M − $2M = $40M, split 80/20: LP gets $32M, GP gets $8M. Total GP carry = $2M (catch-up) + $8M (20% split) = $10M, which equals exactly 20% of the $50M total profit, confirming the catch-up worked as intended.
Why the other options are wrong
- A. Only counts the 80/20 split portion, omitting the GP catch-up amount.
- B. Miscalculates the catch-up amount, likely using an incorrect equation setup.
- C. Applies 20% to the full $80M gross catch-up base rather than the correct $50M total profit.
PE Waterfall with GP Catch-Up
In a PE distribution waterfall, after LPs receive their preferred return, a GP catch-up clause allocates profits fully to the GP until the GP's cumulative share equals the target carried interest percentage of total profits, after which remaining profits split per the carry ratio.
- Catch-up ensures GP reaches full target carry (e.g., 20%) despite preferred return to LPs
- Catch-up amount solved via X/(preferred+X) = target carry %
- After catch-up, remaining profit splits per agreed ratio (e.g., 80/20)
Memory trick: LPs get their preferred slice, then GP catches up to their full 20% before sharing the rest.