PT - JOURNAL ARTICLE AU - David Slifka TI - Why Most Limited Partners Should Avoid Catch-Ups AID - 10.3905/jpe.2012.15.2.041 DP - 2012 Feb 29 TA - The Journal of Private Equity PG - 41--50 VI - 15 IP - 2 4099 - https://pm-research.com/content/15/2/41.short 4100 - https://pm-research.com/content/15/2/41.full AB - 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.TOPICS: Private equity, real estate, statistical methods, portfolio construction