Catch-up
A feature that lets the GP receive most of the profits after the hurdle until it has its full share.
Once LPs clear the preferred return, the manager receives a large slice of the next profits until its total carry equals its agreed percentage of all profits. Then profits are split as normal.
A full catch-up gives the GP 100 percent of distributions after the hurdle until it reaches its carry percentage of total profits. A partial catch-up, such as 80 percent to the GP and 20 percent to LPs, gets there more slowly and leaves LPs more at moderate returns.
With a full catch-up, a fund that performs well ends up with the same 80 and 20 split as a fund with no hurdle. The difference only shows at returns just above the hurdle, where the catch-up decides how fast the GP recovers its share.
Worked example
LPs contributed $100M, the fund distributes $130M, and the hurdle is $8M for simplicity. LPs first receive $108M. With a full catch-up, the GP receives the next $2M, so it holds 20 percent of the $10M profit so far. The remaining $20M is split 80 and 20: LPs get $16M and the GP $4M. In total LPs receive $124M and the GP $6M, exactly 20 percent of the $30M profit.
Common questions about catch-up
What is a 100 percent catch-up?
A provision under which the GP receives all distributions after the hurdle until its carry equals its agreed share, usually 20 percent, of all profits. After that, profits are split as normal.
Why do LPs care about the catch-up?
It decides how much carry the GP earns at modest returns. A slower, partial catch-up leaves more of the profit with LPs when performance is only a little above the hurdle.