Carried interest with catchup provision version two workout. In this workout, we're going to calculate the total distribution to the limited partners and the general partners. This is also a preferred return to the LP, So the LP will receive the hurdle rate as well as their capital before the GP receives a return of capital or any profit. And this is also going to be, it's gonna show the catchup in what happens if the cash flows or the profits are actually limited to the GP.

So for the investment, the total investment for the purchase of this asset is going to be the negative 100. The exit proceeds, these are the equity proceeds, going to be 145.

For the first waterfall, we will take the total investment times the prorata LP investment of 95%, and we will multiply by one plus the hurdle rate raised to the fifth year, 'cause it's a five year hold and this is an annualized return as well. And I'm linking to my label because it's actually a number that's just coded as a label. And that's going to give me the 139.6. Now it technically, the LP cannot be paid more than the amount of proceeds for the deal. So for example, even though they're owed 139.6, if the deal only brought in 135, they should only be paid the 135 because the GP does not have to come out of pocket for this type of arrangement. So what I'm going to do is I'm going to actually just wrap this.

I want it to be a minus min so that it shows as a negative and in order to do that, I then need to flip the result of this formula so that it shows as a positive so that it's just easier for Excel or at least for us to understand how Excel is viewing the min formula. And then I will compare that to a positive number, which is the exit proceeds here. So if I complete that, I should get a formula here that works if the sale proceeds dip below the 139.6, and it does. So now the remaining profits here are going to be the net of these two amounts. So in terms of the catchup calculation, let's just go ahead and calculate what the catchup should be, and the catchup should be, in theory, a 20% catchup. And the way the catchup works is that it's going to actually go back and look at all of the total proceeds that have been paid out, which at this point is 139.6 and it's going to apply that 80/20 split to the proceeds as if this 139.6 represents an 80% payout of the proceeds. So we're not gonna touch the 139.6, that's already in fact been calculated and guaranteed. Just in terms of how the math works, we're going to gross the 139.6 up to determine what that amount, what those proceeds would have been to guarantee the 139.6. So the way we do that is we simply take the 139.6 and I'm gonna flip it to make it a positive. I'm gonna divide it by one minus the catchup of 20%.

What the 174.5 is, is it's the profits on which 80% is equal to 139.6. Therefore, the catchup provision that we would have returned, the GP 20% would be the 174.5 plus or net of the 139.6. And so 34.9 is in fact the catchup amount that would catch the GP up in terms of the 80/20 split. So that's the theoretical amount. Now the problem is, is that the proceeds that we have don't cover the 34.9. So when we calculate the GP catchup provision for the actual waterfall, we need to actually take the smaller of these two numbers. And so it's going to be the smaller of the 34.9 or the profits that are available, and that brings us to the 5.4.

Now the remaining profits are the sum or the net of these two amounts, and we get down to zero. So the catch up provision has in effect been limited by the lack of profits on this deal. And in this particular arrangement, we didn't even get to the third waterfall. But we can go ahead and calculate it as if we did.

The LPs interest here would be the remaining profits times one minus the 20% of the carried interest, and we would show that as a negative. And the GP, of course would be the remaining profits times the carried interest of 20% shown as a negative as well. And the remaining profits would be then the net of these three items. So if we wanted to check these numbers, we could look at this deal the way catchup provision one works where there are ample profits to go around, and we can see what happens. If we have enough profits, the catchup actually still calculates the same way, but we have enough to actually to claim all of the catchup. And then that leaves some profits left, which are split with the LP and the GP, and we still get down to zero. So that's showing us at least that the formulas are working. So I will put this back into its original format, which again is showing a less appealing deal. I will now show what the returns are for the various parties and that will be the proceeds. And I'm gonna anchor the row here times the prorata investment for the LP. I will copy that down to show the GPs investment of 5% and then I can actually anchor the prorata amounts and copy this across. Now, I actually didn't show the distributions here. There were zero in between entry and exit, but they are. And so I've got zeros across. For the total LP return, I'm gonna have to take the sum of the LP returns from the waterfall, which are the 80% of the remaining profits and the initial preferred return that's part of the preferred hurdle rate. I'm gonna flip that to be positive. And then the sum of the GPs returns, which would be the catchup and the carried interest times negative one and that gives me what the total deal profits were. And that should match the terms of the deal, and it does.

So the IRR here is simply the IRR for each of the streams. And what we're seeing is that because the profits were limited, the only returns that the LP got here was the actual hurdle of 8%. They weren't paid anything in the second or third waterfall, so that 8% reflects the 8% of the preferred hurdle. The GP, of course, got very little from the catchup and then got nothing from the carried interests. So their returns are looking very low. And I'll copy this down and I also put my formulas out here to the right. They're also available on the full version file, which is downloadable. Multiple of money will simply be the ending. Exit investment will be the multiple of money will be the ending proceeds over the opposite of the entry investment. And that's showing, again, a very limited return for the LPs and a barely break even for the GPs. The splits will be the total return for the LP over the total deal return.

And if I anchor the row for the total return, I can copy this down. And that's showing again, a very low split percentage for the GP due to the limited returns. And I'll just copy my formulas out here, and we've completed the catchup provision version two.