CFA mock - 2016 PM - Wanja

CFA Level III
#1

Is anyone else confused by this? According to the CFAI, this statement is correct:

“…private equity managers typically receive carried interest of about 20%, which is paid before any limited partner distribution”.

From the relevant section in the CFA book, it seems to say precisely the opposite?

Thanks

John

#2

Yeah, the general partners are getting their fees before they pay out to investors.

#3

But on page 34 of the official book:

in distributing cash flows to investors and the fund manager, a private equity fund first distributes to investors their invested capital and preferred return… sometimes the fund manager is allowed to take a small percentage of early distributions…etc?

#4

I am confused about this too. Aren’t the limited partners getting their invested capital and returns first, then general partners receive their carried interest?

#5

I wouldn’t say so as I recall level 2 material. There was a table with distributions schedule.

#6

From level 2 curriculum: In the first alternative, the GP receives carried interest only after the fund has returned the entire committed capital to LPs. In the second alternative, the GP receives carried interest on any distribution as long as the value of the investment portfolio exceeds a certain threshold (usually 20 percent) above invested capital.

#7

I believe the GPs can take money from the fund at times before capital is returned to LPs but it’d be subject to clawback. After the capital is returned then GP get their 20% first, then LPS get theirs. But I highly doubt we will tested on structures like this on the exam because it’s a mute point. They’d have to give us specific details that aren’t ambiguous to make a calculation. The reason being PE funds aren’t homogenous in nature, they’re heterogeneous. Investors would have to review the terms before investing.

#8

Thank you. The question in wanja topic test is ambiguous. Because it writes “…private equity managers typically receive carried interest of about 20%, which is paid before any limited partner distribution”. This statement should be false because Capital could be returned to LP first.

#9

Ya usually that only applies after LPs get back their committed capital. But like I said, investor would have to read over the funds policies.