Carried Interest Formula

CFA Level II
#1

What is the formula for Carried Interest?

#2

I know it’s only paid if NAV before Distributions exceeds total committed capital, but how do the distributions fit into this picture?

#3

carried interest is taken out before distributions to the chumps… (LPs)

#4

that’s right, but how about the distributions in the prior year?? For instance, If committed capital is $500m, and after year one, the fund distributed $100m to LPs. After the second year, NAV before distributions is $510m. What is the carried interest @25%?

#5

10m x .25 = 2.5m

#6

depends on the method. For a hurdle rate, you have to determine the IRR of the investment and if it exceeds that, then you calculate the carried interest on profit. It’s always based on NAV before distributions. Another method is deal by deal which they receive CI on every deal and could potentially pay a clawback, or through the method in the book (which is based on predistribution NAV exceeding either commitments or paid-in capital).

#7

Here is how i do it. Calculate carried interest as (NAV Before dist-Committed capital or hurdle rate)*Rate - Cumulative carried interest paid to date. This should work unless there is a clawback.