Suppose the limited partner (also called LP) invests 95.00% of the capital in the fund, and the promoters invest the remaining 5.00%. The sponsor created an entity for this specific limited fund, called the fund manager, and filled in the entity with the individuals employed by the sponsor (? Members? ) (i.e. multiple partner-level employees of the sponsor entity).
Regarding the distribution of cash flow, first of all, limited partners usually enjoy priority income rights, assuming that the cumulative compound annual rate of return is based on the internal rate of return of 9.00%. LP gets this priority return at a predetermined frequency (usually quarterly), and these payments are called distribution. After these allocations to LP, let's look at the net cash items available to LP and fund managers, which are used by fund managers? Catch up? The mechanism is remunerated.
The possible way of working is that from this net line, the fund manager will get the negotiated share of these net cash flows (usually 20.00%) until the negotiated total cumulative share of the total profits (which makes teaching purposes more difficult) is usually 20.00%, so we format it in bold green). Catch-up is achieved through a formula that will run tests to continue to extract 20.00% of net cash flow until the fund manager extracts 20.00% of accumulated net profit.
The formula is as follows: If LP and the fund manager have available net cash during this period, take the smaller of the following two:
A) 20.00% of net cash
B) The accumulated net cash flow of b)LP and the fund manager minus 20.00% of the total net cash received by the fund manager so far.