Sample Questions
Question 1
Easy
A secondary sale as an exit route for a PE fund involves:
Solution
A is correct.
A secondary sale (also called a sponsor-to-sponsor sale or secondary buyout) involves the GP selling a portfolio company to another PE firm. This is one of the most common exit routes, particularly when strategic buyers are not available or when the company would benefit from continued private ownership with a different GP's operational expertise.
A secondary sale (also called a sponsor-to-sponsor sale or secondary buyout) involves the GP selling a portfolio company to another PE firm. This is one of the most common exit routes, particularly when strategic buyers are not available or when the company would benefit from continued private ownership with a different GP's operational expertise.
Question 2
Medium
The GP catch-up provision in a PE fund waterfall is best described as:
Solution
B is correct.
The GP catch-up is a waterfall provision that directs distributions to the GP at an accelerated rate after LPs have received their preferred return, until the GP's cumulative share equals their carried interest percentage of total profits. For example, with a 100% catch-up, the GP receives 100% of distributions after the preferred return is paid until the GP has received 20% of cumulative profits. This ensures the GP eventually receives their full 20% share of all profits, not just profits above the preferred return.
The GP catch-up is a waterfall provision that directs distributions to the GP at an accelerated rate after LPs have received their preferred return, until the GP's cumulative share equals their carried interest percentage of total profits. For example, with a 100% catch-up, the GP receives 100% of distributions after the preferred return is paid until the GP has received 20% of cumulative profits. This ensures the GP eventually receives their full 20% share of all profits, not just profits above the preferred return.
Question 3
Hard
Assume Fund VI is wound up today with the remaining NAV realized at its reported $360M value. Based on the Exhibit 1 waterfall, the total carried interest payable to the GP is closest to:
Solution
A is correct.
Private equity waterfall (8% preferred return, 100% GP catch-up, 80/20 carry): once the hurdle is cleared and the GP fully catches up, the GP receives 20% of the entire profit pool.
| Step | Calculation | Result |
|---|---|---|
| Total proceeds | $1,440M distributions + $360M realized NAV | $1,800M |
| Profit above paid-in capital | $1,800M − $720M | $1,080M |
| 8% preferred return test | = $720M x 0.8509 | $612.7M |
| Hurdle check | Profit $1,080M > preferred $612.7M | Cleared |
| GP carry after 100% catch-up | 20% x $1,080M | $216M |
| **Carried interest to GP** | **$216M** | |
Because the GP fully catches up after the hurdle, carry is computed on the entire profit pool ($1,080M), not on the profit above the preferred amount.
Private equity waterfall (8% preferred return, 100% GP catch-up, 80/20 carry): once the hurdle is cleared and the GP fully catches up, the GP receives 20% of the entire profit pool.
| Step | Calculation | Result |
|---|---|---|
| Total proceeds | $1,440M distributions + $360M realized NAV | $1,800M |
| Profit above paid-in capital | $1,800M − $720M | $1,080M |
| 8% preferred return test | = $720M x 0.8509 | $612.7M |
| Hurdle check | Profit $1,080M > preferred $612.7M | Cleared |
| GP carry after 100% catch-up | 20% x $1,080M | $216M |
| **Carried interest to GP** | **$216M** | |
Because the GP fully catches up after the hurdle, carry is computed on the entire profit pool ($1,080M), not on the profit above the preferred amount.
