One distribution on an illustrative $200m buyout fund, run investor by investor through a European waterfall.
A distribution is allocated in two passes: gross proceeds go to each investor in proportion to its share of the investment, and then each investor's share runs through the waterfall on its own capital account, with its own fees, its own preferred return and its own carry terms. On an illustrative $260.0m exit from a $200m fund, carried interest is $18.76m in total but 9.80 per cent of commitment for the low-fee anchor against 9.50 for the other LPs, and the GP's own commitment keeps its full $5.20m. Netting carry at fund level and splitting the rest by commitment misallocates $375k.
Worked in full in The Private Equity Fund Controller Playbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A buyout fund with $200m of commitments is making its first distribution after three years. It has drawn $150.0m for investments and $3.0m of expenses pro rata to commitments, and charged management fees on commitments: 2.0 per cent a year for most investors, 1.5 per cent for an anchor, nothing on the GP's own commitment, which also bears no carry. The waterfall is European (whole of fund): return of all contributions including fees, an 8 per cent preferred return compounded annually, a full catch-up, then 80/20. To keep the arithmetic visible, every contribution is treated as made three years before the distribution, so the preferred return is 25.97 per cent of contributed capital. A real close dates each call. All figures illustrative, $m.
| Investor | Commitment | Fee rate | Investments | Expenses | Fees | Contributed |
|---|---|---|---|---|---|---|
| A | 90.0 | 2.0% | 67.50 | 1.35 | 5.40 | 74.25 |
| B | 60.0 | 2.0% | 45.00 | 0.90 | 3.60 | 49.50 |
| C, anchor | 46.0 | 1.5% | 34.50 | 0.69 | 2.07 | 37.26 |
| GP commitment | 4.0 | 0.0% | 3.00 | 0.06 | 0.00 | 3.06 |
| Total | 200.0 | 150.0 | 3.0 | 11.07 | 164.07 |
Exit proceeds belong to investors in proportion to their participation in the investment, here their share of commitments, because no one was excused. A takes 45.0 per cent of $260.0m, $117.00m; B $78.00m; C $59.80m; the GP commitment $5.20m. Fees play no part in this step: they were not invested.
Gross share = proceeds × participation = 260.0 × 45.0% = $117.00m for A
Excel: =Proceeds*B2/SUM($B$2:$B$5)
Each carry-bearing investor's gross share pays back its contributed capital first, then its preferred return, then the GP catch-up, then 80/20. With a full catch-up and enough profit, carry ends at exactly 20 per cent of that investor's profit, which is the test of a correct catch-up calculation.
LP A: profit = 117.00 − 74.25 = 42.75; pref = 74.25 × 25.97% = 19.28
Catch-up = 19.28 × 20 / 80 = 4.82; carry = 4.82 + 20% × (42.75 − 19.28 − 4.82) = 8.55 = 20% × 42.75
LP C: profit = 59.80 − 37.26 = 22.54; carry = 20% × 22.54 = 4.51
| Investor | Gross share | Profit | Pref | Carry | Net distribution | Carry % of commitment |
|---|---|---|---|---|---|---|
| A | 117.00 | 42.75 | 19.28 | 8.55 | 108.45 | 9.50% |
| B | 78.00 | 28.50 | 12.86 | 5.70 | 72.30 | 9.50% |
| C, anchor | 59.80 | 22.54 | 9.68 | 4.51 | 55.29 | 9.80% |
| GP commitment | 5.20 | 2.14 | n/a | 0.00 | 5.20 | 0.00% |
| Total | 260.00 | 18.76 | 241.24 |
The anchor pays more carry per dollar committed, not less. Its lower fee means it contributed less for the same investment, so its profit is larger and 20 per cent of a larger profit is a larger carry. It still ends ahead: a net multiple of 1.48 times its contributed capital against 1.46 for A and B. The fee discount and the carry are two separate lines on its capital account, and both have to be right.
Because each investor has its own contributed capital, each clears its preferred return at a different fund-level proceeds figure: about $207.9m for A and B, $204.1m for the anchor. Between the two, only the anchor pays carry.
| Fund proceeds | A | B | C, anchor | Total carry |
|---|---|---|---|---|
| 200.0 | 0.00 | 0.00 | 0.00 | 0.00 |
| 206.0 | 0.00 | 0.00 | 0.44 | 0.44 |
| 230.0 | 5.85 | 3.90 | 3.13 | 12.88 |
| 260.0 | 8.55 | 5.70 | 4.51 | 18.76 |
At $206.0m the fund as a whole is below its hurdle on a pooled view, yet $0.44m of carry is due from one investor. A controller who runs a single fund-level waterfall will report zero carry and understate the GP's entitlement; one who reverses that error later will produce a carry line that jumps for no visible reason.
Many LPAs define the waterfall per investor, as here. Some run it at fund level and then allocate. Read the distribution clause before building the model: it decides which of the two answers is contractually right.
The shortcut is to run one waterfall on the carry-bearing investors in aggregate, take carry off the top, and split the remaining $241.24m by commitment. In this case the total carry happens to match, $18.76m, because everyone is past the catch-up. The allocation does not. The GP commitment, which bears no carry, receives $4.82m instead of $5.20m: $375k short, because it has been charged a share of other investors' carry. A, B and the anchor are each overpaid, by $109k, $73k and $194k. The anchor is overpaid most, since the shortcut also ignores that its carry is higher.
The error is invisible in the fund's cash, which totals correctly, and surfaces in the capital accounts, which is where investors check. The free workbook for this case allocates a distribution investor by investor and rolls every capital account, with the tie to NAV run as a check.
The preferred return in this case is simplified to a single date; for the dated version, see how to calculate the preferred return in a private equity fund.
Per dollar committed, often yes. A lower fee means less contributed capital for the same investment, so the investor's profit, and 20 per cent of it, is larger. In this illustrative fund the anchor at a 1.5 per cent fee pays carry of 9.80 per cent of its commitment against 9.50 for investors at 2.0 per cent, yet still earns a higher net multiple, 1.48 against 1.46.
Usually not: the GP's own commitment, and often employee feeder interests, are carry-free and frequently fee-free. They must be taken out of the carry calculation before anything is allocated. Here the GP commitment of $4.0m receives its full $5.20m share of a $260.0m distribution; a pooled shortcut would give it $4.82m.
In most European waterfalls, yes: the first tier returns all contributed capital, including amounts called for fees and expenses, before the preferred return and carry. In this case investor A must receive back $74.25m, of which $5.40m was fees, before any carry is due on its $117.00m gross share.
This article is one calculation from The Private Equity Fund Controller Playbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: private equity and private markets → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.