Waterfall distribution

CFA Level II Alternative Investments
#1

I still stand to figure out the correct way to apply the first alternative of the Total Return Method of distribution waterfalls…

First alternative says: “GP receives carried interest only after the fund has returned the entire committed capital to LPs.”

Thus, I understand, that if committed capital ist 100, there has to have been a distribution to the LPs totaling 100 before the GP receives any carried interest.

In the examples, it is phrased as that portfolio value or NAV before distribution needs to exceed committed capital. This would then not be depending on what has actually been paid out to the LPs.

Somebody please clarify…

#2

Hi Mercutio.

Firstly I was also tricked by this question, but you have to realise one thing, the carried interest in based on the concept of return and if the return is not on a deal by deal basis then as per the waterfall method, the return should ideally depend on the actually overall return rather than the committed capital, thus NAV before distribution is nothing but the cumalative return that the fund has earned till this date, thus making the calculation more apt.

Hope I have answered your question.