Answer:
Before we answer that, let us make the following assumptions.
a) Investors have put in 100 Mill $
b) 10% p.a. Hurdle Rate
c) 20% Carried interest (catch up)
d) 80:20 Share after the carried interest
Suppose the fund started with 100 Million $ and end of the year it is liquidated and made 200 Million $ i.e 100 Million $ of Profit. The distribution is as follows:
a) First the investor gets paid his capital from the 200 Million i.e. 100 Mill is paid out.
b) Next 10% return out of the Profit (200-100) is paid. In this case 10 million (100*10%). This leaves 90 Million $ available.
c) 20% carried interest is then paid. i.e 20% on 100 Million profit= 20 Million (Some calculate it 20% on 90 Million i.e after the hurdle=18 Million)
d) This leave 100-10-20= 70 Million profit.
e) This is then share 80:20 between investors and mgt. i.e 56:14
To summarize:
LP investors get for the $100 Million investment = 100+10+56=166 Million.
Mgt gets for their effort = 20+14=34 Million.