I haven’t read through CFAI (only Schweser for this section), but supposedly, net asset value before distributions has to exceed committed capital in the first waterfall distribution method for carried interest to be earned. However, previous net asset values after distributions are the basis for the current year calculation of NAV before distributions. Therefore, if I am a PE fund, wouldn’t I want to delay distributions so I could earn carried interest sooner? Something sounds fishy.
yea but there might be something baked into the contract to where they have to pay out some amount
But as you pointed out the NAV *before* distribution for *this* year is calculated using NAV *after* distribution in the *prior* year. So the quicker you distribute the cumulated profits also called the DPI, the more is your basis for this year NAV calculation and the more there is a probability of you shotting over the Committed Capital and getting the Carried interest.
Actually, swaptiongamma, I see here that carried interest is paid on this amount: NAV before distributions (and after management expense) this year minus NAV before distributions (and after management expense) in the previous year. However, one year prior to that (two years in the past from today), NAV after distributions has an effect of the carried interest calculation. I was thinking that the higher the DPI (realized profits that are distributions), the lower the NAV, analogous to how dividend distributions reduce asset value and equity in a company. Unless I am missing something here, does committed capital change with distributions?
For the 1st waterfall distribution model if(NAV(before)(t) > CC) { CI($$) = [NAV(before)(t) = NAV(before)(t-1)]*[CI(%)] } NAV(before)(t) = NAV(after)(t-1) + CCD +OR - MF NAV(before)(t-1) = NAV(after)(t-2) + CCD +OR - MF From this code logic you can easily see that everything depends on the *NAV(after)* stuff. Also CC does not usually change for the life of the fund. The GP will call the capital into the fund as anf when the need be (which is also called the Capital Called Down). Even if the CI(t) is received by the GP and the next years PEFund performance is nuked then due to the clawback arrangement, they have to give back the pro-rated CI received prior to level it out.