Explain whole-fund carry vs. deal-by-deal carry and which approach prevails in the European market.
Two carry-calculation modes:
- Whole fund (European style) — the sponsor receives carry only once ALL of the fund's investments have flowed back and the hurdle (8% IRR) is met on the fund as a whole. Loss carryforward applies (LP-friendly).
- Deal-by-deal (American style): carry per individual deal, as soon as it is profitable. With a clawback clause if aggregate performance is weaker. GP-friendly.
essentially 100% European-style. The major European franchises all use whole fund. Deal-by-deal is mainly found in US funds, but even there it is in decline.
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- LP receives 100% up to the return of its contribution.
- LP additionally receives an 8% IRR (preferred return).
- Catch-up: the sponsor receives 100% until the 80/20 ratio is reached.
- Thereafter an 80/20 split LP/GP.
ILPA guidelines (2019/2022 updates) are clearly pushing the market toward European-style — fairer for LPs, more transparent in the calculation. In the middle market, deal-by-deal is effectively no longer negotiable.
Sponsors with whole-fund carry have a strong interest in making every investment at least "good" — they cannot afford a total loss. This leads to conservative risk management at the fund level and longer holding of underperformers, which shows up in the DPI.
In the interview, mention that whole-fund carry leads to conservative risk management at the fund level — and thus to longer holding of underperformers. This is an important LP-vs-GP conflict of interest that every top-quartile sponsor addresses.