Catch-up rate

CFA Level I Alternative Investments
#1

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Could anyone please how to calculate catch-up rate? I don’t understand catch-up clause?
And the solution is wrong because it don’t include 20% of 16 million because this is SOFT-HURDLE RATE.
GP’s return = 20%x16 + 4 + 8 = 15.2

#2

A soft hurdle catch up clause.

Bear with me and I will explain more later

  1. If return is hurdle, <=8% , the investor gets everything
  2. if return is equaly to or greater than >= 10% (8% / 80%) then then EVERYTHING is shared 20/80
  3. Between 8% and 10% the fund manager gets all between 8% and 10%

It is part 3 that is the “catch-up” below 8% the fund manager got nothing but after 8% they get to catch up until there share is at 20% and then we share 80/20

so think return is 5%
All to investor
Return is 9%
8% return to investor 1% to manager (split 89/11)
return is 10%
8% return to investor 2% to manager (split 80/20)
return is 20%
16% return to investor 4% to manager (split 80/20)
return is 60%
48% return to investor 12% to manager (split 80/20)

In answer the questions think
Is return below hurdle
YES all investor
Is return above theshold level = hurdle rate/investor share = 8%/0.8 = 10%
YES then split everything 80/20
if NO to abive then return between 8% and 10%
First 8% to investor
Rest to manager

2 Likes
#3

Is Hard hurdle rate with catch up clause the same as soft hurdle rate with catch up clause?
From my point of view, catch up clause only comes with hard hurdle rate because the Preferred return is received 100% by limited partners with the catch up clause → it looks the same as hard hurdle rate which is received 100% by limited partners.
Soft hurdle rate : preferred return is received both by general partner and limited partners.
What are your opinions?

#4

from text.

"Hurdle rate agreements sometimes distinguish between a hard hurdle rate, where the manager earns fees on annual returns in excess of the hurdle rate, or a soft hurdle rate, where the fee is calculated on the entire return when the hurdle is exceeded. With a soft hurdle, GPs are able to catch up performance fees once the hurdle threshold is exceeded."

Hard hurdle - no catch up clause
Soft hurdle - catch up clause