What is the GP catch-up provision and how does it affect the carry split?

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AcadiFi · Accepted Answer

The catch-up provision is an intermediate tier in the distribution waterfall designed to make the GP 'catch up' to its full 20% share of total profit after LPs receive preferred.

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Consider Blackmere Growth Fund, $800M commitment, 8% preferred return, 20% carry, 100% catch-up, European waterfall. Fund returns $1.8B after exits (total profit = $1B over the life).

Without catch-up:
- LPs get $800M capital back
- LPs get 8% preferred on full $800M ≈ $340M (simplified over fund life)
- Remainder ($660M) splits 80/20: LPs get $528M, GP gets $132M
- GP carry as % of total profit: $132M / $1B = 13.2% — not the intended 20%

With 100% catch-up:
- LPs get $800M capital back
- LPs get 8% preferred: $340M
- CATCH-UP: 100% to GP until GP has received 20% of total profits distributed so far. LPs have $340M of profits; 25% catch-up math means GP needs roughly $85M to reach 20/80 proportion on amounts distributed above capital.
- Remaining ~$575M splits 80/20
- End result: GP carry totals approximately 20% of total profit, LPs get 80%

Catch-up can be 'full' (100%, most GP-friendly) or 'partial' (e.g., 50/50 catch-up split). Full catch-up is standard in most institutional PE funds.

The effect: preferred return becomes a timing instrument rather than a true hurdle. If the fund eventually delivers strong returns, LPs still get their 80% share overall. If the fund barely clears the preferred, GP may earn little or no carry.

What is the GP catch-up provision and how does it affect the carry split?

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