Gross investment performance is only the start of the LP return.
LPs fund both investments and the costs of running a fund. This model first returns all contributed capital, then pays an annual compound preferred return to the LP. Remaining proceeds are either split immediately at the carry rate or first allocated entirely to the GP until its share of distributed profit reaches that rate.
The capital and distribution timing is deliberately explicit: investments, all management fees and all expenses are funded at year zero, and company proceeds arrive in one terminal distribution. Annualized outputs describe those two cash flows. Real deployment, later capital calls, interim distributions and changing NAV need a dated fund cash-flow model.
The formula, made clear.
- Return of capital
- All entered investment, fee and expense contributions are returned before profits are distributed.
- Full GP catch-up
- After the LP preferred return, the GP receives up to preferred paid × carry/(1−carry); any balance then follows the carry split.
- No catch-up
- The GP participates only in proceeds above returned capital and the LP preferred return.
- Fee drag
- Gross investment MOIC less proceeds/contributed capital; carry drag is GP carry/contributed capital. These multiple differences add to the total drag.
Put the numbers in context.
$80,000,000.00 invested plus $20,000,000.00 of fees and expenses requires $100,000,000.00 contributed. A 2.5× gross exit returns $200,000,000.00. At an 8% five-year hurdle and 20% carry with full catch-up, the LP receives $180,000,000.00: 1.8× net MOIC.
| Input | Example value |
|---|---|
| Capital invested in companies at year zero | $80,000,000.00 |
| Lifetime management fees contributed at year zero | $15,000,000.00 |
| Lifetime fund expenses contributed at year zero | $5,000,000.00 |
| Gross investment proceeds / invested capital | 2.5 × |
| Years from initial contribution to distribution | 5 years |
| Carried interest | 20% |
| Annual compound preferred return | 8% |
| Catch-up convention | 100% to GP until fully caught up |
| Net LP distribution / contributed capital | 1.8× |
What this calculation assumes
One LP capital account and one terminal whole-fund distribution; return of all contributed capital before carry. All fees and expenses funded at time zero, annual compound hurdle on that entire contribution, and either no catch-up or 100% GP catch-up. No GP capital participation, deal-by-deal carry, interim distributions, recycling, clawbacks, escrow, tax, subscription facilities or residual NAV. Fee amounts are paid outside investment capital, not deducted again from terminal proceeds. Annualized outputs are stylized two-cash-flow rates, not actual fund IRR or XIRR. A zero distribution is shown as a −100% total-loss convention.
Methodology references
What to consider next.
Inspect the allocation tiers, then compare with a no-catch-up case. Use the fee schedule for a cost budget; actual gross-to-net IRR requires all dated contributions and distributions.
How we approach financial models →