What is a GP catch-up?

The catch-up rate is set in the LPA’s distribution provisions and varies: 100% is a full catch-up, while 50% or 80% splits each dollar with investors during the phase. Some funds have none, so carry is paid only on profit above the hurdle. It is often confused with the hurdle itself, which it follows, and with clawback, which corrects over-distribution later.

Say a fund has an 8% hurdle, 20% carry and a full catch-up. Once investors get their 8%, the manager takes every dollar next, until it holds 20% of all profit.

It decides how quickly a manager gets from nothing to its full carry, and so how much it matters when returns only just clear the hurdle.