medium · Private Equity & LBOs

If a sponsor's hurdle rate is 8% and they perform a dividend recap in Year 3 that returns 50% of their capital, how does this affect the 'Total' profit that will eventually be subject to the 20% carried interest?

1. It increases the total carry because the sponsor has 'crystallized' a gain.
2. It has no impact on the carry calculation as carry is only calculated at the final exit.
3. It reduces the total preferred return owed to LPs over the hold period because unreturned capital is lower.
4. It decreases the carry because the interest expense reduces the fund's total profit.

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