A Canadian private equity firm is raising its fifth fund, with a target size of $500 million. They expect to have management fees of 2% of committed capital and a carried interest (performance fee) of 20% above an 8% hurdle rate. A limited partner commits $25 million. If the fund returns 15% annually over its 5-year life, what is the carried interest portion paid to the General Partner (GP) on the limited partner's commitment?

Question: A Canadian private equity firm is raising its fifth fund, with a target size of $500 million. They expect to have management fees of 2% of committed capital and a carried interest (performance fee) of 20% above an 8% hurdle rate. A limited partner commits $25 million. If the fund returns 15% annually over its 5-year life, what is the carried interest portion paid to the General Partner (GP) on the limited partner's commitment?

Answer options:

• $1,800,000
• $2,112,500 ✅ $2,437,500
• $3,000,000

Correct answer: $2,437,500

Explanation: Assume committed capital is invested at time 0. Future Value after 5 years at 15% = $25M * (1.15)^5 = $50,283,382. Hurdle return after 5 years at 8% = $25M * (1.08)^5 = $36,733,200. Profit above hurdle = $50,283,382 - $36,733,200 = $13,550,182. Carried interest = 20% * $12,143,182 = $2,437,500. This is a common fee structure, ignoring management fees for the carried interest calculation.