The Carried Interest Calculator provides a comprehensive analysis of fund economics by calculating multiple components of the GP-LP relationship. Understanding how to input data correctly and interpret results is crucial for both fund managers and investors evaluating fund structures.
1. Fund Size and Capital Structure
Begin by entering the total fund size, which represents the capital committed by limited partners. This is the amount that the fund will invest across multiple portfolio companies over its investment period. Fund sizes can range from small venture capital funds of $10-50 million to large buyout funds of several billion dollars. The fund size directly impacts the scale of potential returns and the magnitude of carried interest payments.
2. Performance Metrics and Returns
Input the total return generated by the fund, which includes all distributions to investors, dividends, and the final value of remaining investments. This represents the gross proceeds before any fees or carried interest. The relationship between fund size and total return determines the fund's overall performance and whether the hurdle rate has been met. Strong performing funds may generate returns of 2-5x the original capital, while underperforming funds may return less than the original investment.
3. Fee Structure and Terms
Specify the carried interest rate (typically 20%), hurdle rate (typically 6-10% annually), and management fee rate (typically 1-3% annually). These terms are negotiated between GPs and LPs and can vary significantly based on market conditions, fund size, and manager track record. Higher hurdle rates provide better protection for LPs, while higher carry rates provide stronger incentives for GPs. The fund life determines the period over which management fees are calculated.
4. Analyzing Results and Implications
The calculator provides detailed breakdowns of how returns are distributed. Key metrics include total profit, hurdle amount, excess profit subject to carry, actual carried interest paid, management fees, and net returns to LPs. Understanding these components helps both GPs and LPs evaluate the fairness of the compensation structure and the alignment of interests. High carried interest payments relative to management fees indicate strong performance, while low excess profits may suggest the fund barely met its hurdle rate.