To understand how to calculate carried interest, let's take Fund Alpha as an example. It has the following information:
Calculate the fund return using the formula:
\[ \text{fund return} = \frac{\text{final fund value}}{\text{initial fund value}} - 1 \]
For our carried interest example, the fund return is equivalent to:
\[ \frac{\$20,000,000}{\$10,000,000} - 1 = 100\% \]
Calculate the carry distribution using the formula:
\[ \text{carry distribution} = (\text{final fund value} - \text{initial fund value} \times (1 + \text{hurdle rate}) ^ \text{hold period}) \times \text{carried interest} \]
For Fund Alpha:
\[ (\$20,000,000 - \$10,000,000 \times (1 + 0.05)^5) \times 0.20 = \$1,447,436.87 \]
