Carried interest (alternative investement)

CFA Level III Portfolio Management
#1

The CFAI text states (page 34 of Reading 24):

The fund manager incentive fee, the carried interest , is the share of the private equity fund’s profits that the fund manager is due once the fund has returned the outside investors’ capital

In the 2016 PM mock, the following sentences can be found :

[question removed by moderator]

I choose carried interest but that was not the correct answer.

I do understand the correct answer (management fees) but i do not understand why the statement regarding carried interest is correct.

Should one understand “distribution” as “profit distribution”, excluding invested capital?

#2

bump : can someone clarify the rule regarding carried interest payment?

I am reading my notes again and i still do not understand this point

#3

I got this wrong as well for the same reason, and even made a note that carried interest is paid first. Now I am confused again too.

#4

dont strecth your nerves too much on this. i work in PE. When you exit an investment, you return the investors capital back plus the agreed return. Any realized return above that may be distributed to the PE managers in the form of carried interest as per the LP-GP agreement. If, for any reason, you are entitled to carried interest before the end of the fund lifecyle (as may be the case if the fund has several investments and staggered exits) if you exit a subsequent investment at a loss the limited partners may claw back the carried interest you have previously earned.

#5

Got the same “error” and thanks for posting the CFAI passage. I understand the point of making the mock challenging but I think some of the vaalue is lost if it generates confusion. What are we supposed to answer if we get the same question on the exam?? .

#6
  • So, carried interest is distributed before paying LP the committed return.
  • If claw back provision is used, carried interest is being back to make up the shortfall of LP’s committed return.

Please correct me if I am wrong.

Thanks

Regards,

Jahid

#7

Yes I believe this is right. I always thought it was the LP get paid first and then the Manager but I think via the claw-back provision, the carried interest being paid to the manager FIRST and then the LP makes sense because if at the end of the fund the LP doesn’t get their state return then the claw-back provision is enforced.