Carried Interest Calculation

Water Cooler Investing
#1

Hello everyone,

Need your HELP!

I am writing a paper on Carried Interest and one simple (not so simple actually) but an important issue comes out. Let’s say:

i) I have a deal-by-deal approach, meaning I receive CI for every deal in case IRR > Hurdle ii) There are some dividends before Exit. When calculating the CI for a particular investment and hence needing to estimate the Exit Value (as CI =[CI%]*[(Investments Costs*[(1+Hurdle)^n)])-Exit Value**]**, should I consider the Exit value as:

A) = Dividends + Exit Value B) = Dividends ( discounted until the Exit Date according to the time value of money ) + Exit Value I believe choice B is more relevant as there should be a reward for GPs to provide dividends earlier, but there is no mention of such a discount rate on any litterature / books. And even less of its value. Any thoughts how to solve this? Thanks a lot for your help!

#2

I think B will get you there. In reality the carried interest is calculated like a bank balance in that any dividends will reduce the balance of the carried interest (just like a loan payment would). The carried interest balance repreents the contributed capital plus the accrued preferred return.

#3

Thanks for your answer, I will choose B then. But choosing the discount rate is strange than…Should it be equal to the hurdle?