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The Journal of Private Equity

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Article

Why Most Limited Partners Should Avoid Catch-Ups

David Slifka
The Journal of Private Equity Spring 2012, 15 (2) 41-50; DOI: https://doi.org/10.3905/jpe.2012.15.2.041
David Slifka
is a vice president—Real Assets at the YMCA Retirement Fund in New York, NY.
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  • For correspondence: slifka@ymcaret.org
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Abstract

Private fund fee structures typically contain a catch-up—a widespread limited partner preference—despite the fact that it increases fund fees and misaligns incentives. By estimating carried interest paid based on published histories of real estate opportunity fund returns, this article shows that fee structures with no catch-up and a lower hurdle have been roughly 14% less costly to limited partners than structures with a catch-up and higher hurdle. Alignment of interests is generally optimized by a more linear non-catch-up compensation structure, although IRR-focused investors may prefer a catch-up.

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The Journal of Private Equity: 15 (2)
The Journal of Private Equity
Vol. 15, Issue 2
Spring 2012
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Why Most Limited Partners Should Avoid Catch-Ups
David Slifka
The Journal of Private Equity Feb 2012, 15 (2) 41-50; DOI: 10.3905/jpe.2012.15.2.041

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Why Most Limited Partners Should Avoid Catch-Ups
David Slifka
The Journal of Private Equity Feb 2012, 15 (2) 41-50; DOI: 10.3905/jpe.2012.15.2.041
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  • Article
    • Abstract
    • VALUE OF THE CATCH-UP TERM
    • RESULTS
    • DISCUSSION
    • INCENTIVES UNDER HARD AND SOFT HURDLES
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B1
    • APPENDIX B2
    • APPENDIX C
    • ENDNOTES
    • REFERENCES
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  • Editor’s Letter
  • Editor’s Letter
  • Profitability Analysis of Select Private Equity Funds in India
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