Carried interest, true preferred workout. In this workout, we're going to calculate the total distribution to the limited partners and the general partners. And in this particular transaction. the ownership has been structured with a preferred return that is a true preferred return, so the LP is going to receive this preferred return in which they will achieve the hurdle rate before the GP sees any return of capital or profits.

So in this situation, we have a total investment here for this asset of 100 with 95% being provided by the LP and 5% for the GP. The exit equity value after year five is 212. There's a hurdle rate of 8% and carried interest on the transaction for the GP is 20%.

So we'll see how the carried interest plays in with the preferred return instrument. In terms of the waterfall, the investment in the deal is the negative 100. There are no distributions until the exit value proceeds are returned to the equity holders. In this case, it's the 112. To calculate the LP preferred return, we're simply, again, because it's a true preferred, it's only being offered to the LPs. So the formula for this is going to be the minus min and we're doing a minus min here because we want to first of all, we want this to show as a negative because it's a waterfall and we wanna basically show the profits being distributed down to zero. And secondly, the purpose of the min itself is so that we never pay the LPs more than the actual profits are on the deal. So in other words, if for example, it's a very bad deal and they don't earn the hurdle, the LPs would be entitled to those funds but they certainly wouldn't be entitled to more than that. So what we'll do is we'll put in min formula here and that will effectively cap the return to the LP at the smaller of the equity value or the return that they are owed, the minimum return that they are owed, the hurdle rate. So that will be the opposite of the total investment times the 95% times one plus the hurdle rate of 8% raised to year five, and in this case, our years are actually numbers. They're just coded to show up as year five with a label. So that should return for us the calculated hurdle and we will set that against, of course, the amount of the exit proceeds again, so that we don't ever go over that. And that should give us, in this case, the total preferred return of 139.6. So just to show you what would happen. So 139.6 is what they are contractually obligated to be paid before the GPs can receive anything. However if let's say it weren't such a good deal and the exit proceeds were 125, the LPs would be entitled to all of that 125 because that's the terms of the deal, but they certainly wouldn't be entitled to anymore because there isn't anymore. So I will turn that back and now we can calculate the remaining profits, and that's simply gonna be the net of those two. And I'll put my formulas out here to the right, but we might not be able to see all of them. They are of course on the full workout which is available in the same location on the website. So now we can turn our attention to the carried interest and in this situation now, the carried interest is going to be calculated as the 20% times the remaining profits, and we have to flip that to be negative as well. And the LP will now receive the rest which is also the same as the remaining profits times one minus the carried interest or 80%. And again, we'll flip that to show it as a negative, our cash flow, and then we get to remaining profits of zero. So again, what this does is it actually just kind of tilts the scales a little bit more toward the LP and allows them to claim that first waterfall distribution entirely for themselves without the GPS dipping in at all. Now there is a difference in terms of the waterfall calculation. In this form is kind of what's known as the European waterfall, whereas the GP has to wait for the LP to earn the return and the capital. The American style waterfalls, the GPs actually do not have to wait for the capital to be repaid to the LP before they can start earning their carry. So it allows for the GPS to actually start seeing profits a little bit sooner in the deal. And if there are distributions sooner in the deal, that can certainly matter for the GP. So the American waterfalls tend to be favored of course by GPs, European style waterfalls of course by LPs. Now we can take a look at the returns and what we'll do here is we'll simply look at the cash flows to both the LPs and the GPs, and that's going to be equal to the exit proceeds. And I'll anchor that row times the pro rata investment which is equal to 95 and 5%, and then we can also anchor that pro rata investment amount and copy this across through year four. And all that's doing is basically taking the 95 times the zero and the five times the zero. Now when we get to year five, what we have to do is actually just take the sum of the distributions for the LP and the GP. So that's going to be the sum of the LP returns of the 139.6 and the 57.9 and we need to flip those to make them positive. And then we'll take this sum of the GP return which is only the 14.5 in this case, and we need to flip that to make it positive. And what we should see in the total deal return are the terms of the deal which are the negative 100 going in and 212 going out, as we do so. Now what we need to do is to calculate the metrics for these two investors. We'll look at the IRR and we'll look at the multiple of money, as well as the split. So the IRR is simply going to be for the LP, the IRR of those cash flows and similarly for the GP and the overall deal. The multiple of money will be the exit proceeds over the opposite of the investment proceed will be the exit proceeds over the opposite of the investment.

And the copy of my formula's out here and the splits will be the total return for each group over the total deal return.

And if we were to compare the splits for a true preferred deal versus a pari passu, we would see that the splits favor the LP slightly in the true preferred deal than it does in the pari passu deal because of the ability in the pari passu deal for the GP to get in on that first waterfall. And lastly, I will show my formulas off here to the right and we have completed the calculation of the carried interest with a true preferred return.