hard · Private Equity pe-core

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 pool because the sponsor has effectively 'crystallized' a realized gain early.
2. It has no impact on the carry calculation at all, since carry is only ever 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 eventual carry because the added interest expense reduces the fund's total realized profit.

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