In PE distributions, what is the purpose of a catch-up provision?

• A. It ensures LPs receive their preferred return before GP carry
• B. It allows GP to receive more distributions after the hurdle to reach target carry
• C. It ensures the fund pays taxes
• D. It ensures management fees increase

Answer: (B)

The catch-up is a mechanism in the profit waterfall that accelerates the GP’s share after the LPs have received their preferred return. Once the hurdle is satisfied, the catch-up allows the GP to take a large portion of the next distributions so that the GP’s cumulative carried interest reaches its target level. After this catch-up phase, remaining profits are split according to the agreed carried interest, typically favoring the GP by the preset percentage.

So the purpose is to enable the GP to receive more distributions after the hurdle to reach the target carry, which is exactly what the catch-up accomplishes. It’s not about taxes or increasing management fees, and the hurdle itself is what governs LPs getting their preferred return first.