RT Journal Article
SR Electronic
T1 Why Most Limited Partners Should Avoid Catch-Ups
JF The Journal of Private Equity
FD Institutional Investor Journals
SP 41
OP 50
DO 10.3905/jpe.2012.15.2.041
VO 15
IS 2
A1 David Slifka
YR 2012
UL https://pm-research.com/content/15/2/41.abstract
AB Private fund fee structures typically contain a catch-up—a widespread limited partner preference—despite the fact that it increases fund fees and misaligns incentives. By estimating carried interest paid based on published histories of real estate opportunity fund returns, this article shows that fee structures with no catch-up and a lower hurdle have been roughly 14% less costly to limited partners than structures with a catch-up and higher hurdle. Alignment of interests is generally optimized by a more linear non-catch-up compensation structure, although IRR-focused investors may prefer a catch-up.TOPICS: Private equity, real estate, statistical methods, portfolio construction