In a whole fund distribution model, the manager typically receives carry when?

In a whole fund distribution model, the manager typically receives carry when?

• A. Carry is paid before investors receive capital back
• B. Carry is paid only after investors receive their capital back plus preferred return
• C. Carry is paid only after all debts are repaid
• D. Carry is paid at the discretion of the manager

Answer: (B)

In a whole fund distribution, profits flow in a specific order known as the waterfall. The investors (LPs) must first receive back their invested capital, and then they’re entitled to a preferred return (a hurdle rate) on that capital before the manager (GP) takes any carried interest. This sequencing ensures investors are compensated first and aligns the manager’s incentives with delivering upside once the downside protections are in place. Only after those conditions are met does the carry kick in, typically on the remaining profits, sometimes after a catch-up step. So the carry is earned only after the LPs have gotten their capital back plus the preferred return. The other options would either pay the GP before LPs are repaid or rely on discretionary timing, which doesn’t match the standard waterfall structure.

In a whole fund distribution, profits flow in a specific order known as the waterfall. The investors (LPs) must first receive back their invested capital, and then they’re entitled to a preferred return (a hurdle rate) on that capital before the manager (GP) takes any carried interest. This sequencing ensures investors are compensated first and aligns the manager’s incentives with delivering upside once the downside protections are in place. Only after those conditions are met does the carry kick in, typically on the remaining profits, sometimes after a catch-up step. So the carry is earned only after the LPs have gotten their capital back plus the preferred return. The other options would either pay the GP before LPs are repaid or rely on discretionary timing, which doesn’t match the standard waterfall structure.