Catch-Up Clause

A term allowing the fund manager to receive most or all distributions after LPs reach their preferred return, until the manager has its full carry share of profits.

Example

After LPs receive capital and preferred return, the manager receives 11,730,000 so its share reaches 20% of profits so far.

Important

A full catch-up means the hurdle does not reduce the manager's total carry in a successful fund.

Related terms

• Preferred Return — A minimum return that LPs must receive, often expressed as an annual rate such as 8%, before the manager earns carried interest.
• Carried interest — The share of a fund's profit that the manager keeps, conventionally around twenty percent, usually payable only above a defined return to investors.

Lessons that explain it

• A hurdle protects LPs when returns are modest, and a catch-up gives it back when they are strong — Carried interest is the manager's share of profits. A hurdle rate means LPs receive a minimum return before carry is paid; a catch-up then lets the manager receive its full share once returns clear the hurdle. (14 min)

All 578 terms in the Investing glossary