The catch-up is not a figure you look up. It is the solution to an equation, and
the equation is small enough to write on one line:
C ÷ (pref + C) = carry rate. Set it in a cell as a solve rather than as an
answer, and it moves on its own the day someone changes the carry rate.
A GP catch-up exists to fix an arithmetic problem created by the preferred return. Once the
limited partners have been paid their capital back and then a preferred return on top of it, the
general partner has received nothing — and the deal was that the general partner receives a
fixed share of profit. The catch-up is the tier that closes that gap before the ordinary split
begins.
The equation, and why it is not simply 20% of the preferred
The common error is to compute the catch-up as the carry rate multiplied by the preferred
return. On a $10m preferred at 20% carry, that gives $2.0m. It is wrong, and it is wrong in a
direction that costs the general partner money.
The reason is that the catch-up is itself part of the profit being shared. After the catch-up is
paid, the general partner has received C, and total profit distributed so far is the preferred plus
the catch-up. For the general partner to hold its contractual share of that, you need:
C ÷ (pref + C) = carry rate
On a $10m preferred at 20%: C ÷ ($10m + C) = 0.20, so C = $2.0m + 0.20C, so
0.80C = $2.0m, and C = $2.5m.
Two and a half million, not two. The half million is the catch-up catching up on itself.
The whole waterfall, on one distribution
A fund has drawn $100m of capital and is distributing $160m. The preferred return accrued is
$10m. Carried interest is 20% with a full catch-up.
Tier
Amount
To LPs
To GP
1. Return of contributed capital
$100.0m
$100.0m
—
2. Preferred return
$10.0m
$10.0m
—
3. GP catch-up
$2.5m
—
$2.5m
4. Residual split, 80/20
$47.5m
$38.0m
$9.5m
Total
$160.0m
$148.0m
$12.0m
Total profit is $160m less $100m of capital, or $60m. The general partner has received $12.0m,
which is exactly 20% of $60m. That is the test the catch-up exists to pass, and it passes to the
dollar.
How to check any waterfall in ten seconds: total profit, multiply
by the carry rate, compare with what the general partner actually received. If a full catch-up has
cleared, the two must be equal. If they are not, either the catch-up has not cleared or a tier is
wrong.
What moves when the carry rate moves
Here is the payoff for setting the catch-up as a solve. Change nothing but the carry rate:
Carry rate
Catch-up
Residual
Total to GP
GP share of profit
15%
$1.76m
$48.24m
$9.00m
15.0%
20%
$2.50m
$47.50m
$12.00m
20.0%
25%
$3.33m
$46.67m
$15.00m
25.0%
Profit is $60m throughout. The final column is the arithmetic check, and it holds at
every rate because the catch-up is derived rather than typed.
A model with $2.5m hardcoded in the catch-up cell produces a wrong answer at 15% and at 25%, and
produces it silently. Nothing errors. The total still ties to the distribution, because the
residual absorbs the difference. Only the split is wrong.
Where the real money is: the preferred, not the catch-up
The catch-up is a rounding difference next to the tier above it. A preferred return can be
written as a simple annual percentage on contributed capital, or it can compound, and the drafting
is not always as clear as the number.
On one worked capital and distribution profile, an 8% preferred return that compounds accrues
$37.2m where a flat, non-compounding reading of the same clause gives
$10m. That is a $27m difference in a tier that sits entirely ahead of the general
partner, on the same document and the same cash flows.
Which is the point worth taking away. The catch-up is the tier people argue about because it is
the one with an equation in it. The preferred return is where the money is, and it turns on
compounding, on the base it is calculated against, and on whether it accrues on committed or
contributed capital.
The four questions to ask of any waterfall
Is the catch-up full or partial? A 50% catch-up shares the tier rather than
allocating all of it, and the general partner reaches its full share later or not at all.
Does the preferred compound, and on what? Committed or contributed capital,
simple or compounding, annual or quarterly. Each combination is a different number.
Is the waterfall whole-of-fund or deal-by-deal? The same total profit
produces different timing, and deal-by-deal creates a clawback.
Does the general partner's total tie to the carry rate on total profit?
If it does not, and a full catch-up has cleared, something in the model is broken.
The workbooks behind this article
Every figure above is a live formula in the companion files for
The Private Equity Fund Controller Playbook. Change one input and the rest of the sheet answers.
They are free, and they need no account and no email address.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.
This note is drawn from The Private Equity Fund Controller Playbook. The book is on Amazon.
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