medium · Private Credit fund-structures-returns-economics

In a standard private equity distribution waterfall with an 8% preferred return and a 20% carried interest with a 100% GP catch-up, what is the specific function of the 'catch-up' tier?

1. To recover management fees and other fund-level operating expenses that were paid to the sponsor throughout the initial investment period.
2. To ensure the Limited Partners receive an additional twenty percent bonus allocation of the remaining distributable proceeds once the hurdle rate is met.
3. To allow the General Partner to receive 100% of distributions until their total profit share equals 20% of the total profits distributed to that point.
4. To return 100% of the Limited Partners' initial invested capital plus any accrued preferred return in full before any profit sharing or carried interest begins.

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