How is the catch-up rate calculated?
I dont understand in the Distribution Waterfall Schweser examples why the catch up rates are calculated as the 25% of LP preferred rates. I saw this 25% in two different problems.
This is the problem:
Year1: LP Contributes 50mill. Hurdle is 8%, catch-up is full (100%) and carry split is 80/20.
Year2: Investment is sold for 100mill
LP Ending Balance: -50(Cont) + 50 (ROC) - 4 (50*8% hurdle) + 36 (residual after deducting Catch up) = 40
GP Ending Balance: 1mill (catch up → .25*4 (hurdle) + 9 (20% residual amount because of carry) = 10
Can someone explain where the value of catch up cost come from?
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