Unrealised Return

CFA Level II Alternative Investments
#1

Hello Everyone,

Why for the calculation of NAV before distribution unreaslised return is added.

I came across a question to calculate carried interest = 20% of change in NAV before distribution

I am confuse why GP will rewarded for unrealised return.

What is the practical aspect of Unrealised return ?

Thanks

#2

Because it is achieved, no matter whether realised or unrealised. The unrealised is just not distributed. Think of the return of a simple stock or portfolio. The realised return is your dividend yield, and the unrealised return is your capital appreciation. The performance is measured by the total return achieved during the period. On this basis can also be arranged additional compensation incentives for the portfolio manager if a predefined hurdle rate is achieved which is similar to the carried interest calculation.

#3

Ok… Agree.

Capital appreciation is only considerable when we are selling stock…So in this case do I have to assume that PE firm has finalised the sale deal.

As in the curriculam reading after IT crisis in 2000 all VC has to exit by writeoff… so what has not been realised yet can reult into different future expected CFs in different scenario.

Thanks