IBBC CAPITAL ACADEMY / 2027
GP economics, alignment and an investment decision
Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.
Learning goals
- Diagnose the case using the stated constraints and quantitative evidence.
- Defend a conditional decision and identify what further evidence could reverse it.
Draft · approximately 65 minutes, excluding further revision.
Decision case · fictional facts
A hypothetical fund receives 100 m capital and ultimately realizes 150 m before carry, after all other expenses. The contract stipulates 20% carry on profit after return of capital, no hurdle or catch-up. A separate annual management fee is 2% of 100 m committed capital and has already been included in the 150 m net realization.
Contract before headline fee
GP responsibilities include sourcing, diligence, investment execution, monitoring, valuation, reporting and exit. Alignment can involve GP capital, carry, clawback, key-person terms and governance rights. Read the actual waterfall: whole-fund and deal-by-deal calculations can distribute carry at different times. Fee base, offsets, expenses and subscription borrowing alter investor economics.
Underwrite value creation and downside
A favorable target fits the manager’s competence, has credible cash generation and a viable value-creation plan. Diligence must test commercial, financial, operational, legal, tax and environmental assumptions. A business plan should separate operational growth, margin improvement, financing and multiple changes, with milestones and downside liquidity rather than a single optimistic exit valuation.
Exit and conflicts change investor outcomes
Trade sales, secondary sales, IPOs, recapitalizations and continuation vehicles differ in timing, control, transaction costs and conflicts. A GP-led continuation transaction needs independent price scrutiny and fair treatment of selling and rolling investors. A high gross multiple can leave modest net returns after fees, time and dilution; show the LP cash-flow bridge.
GP duties span the entire fund life
The GP’s job does not end when a transaction closes. It must oversee portfolio governance, monitor business-plan execution, manage fund liquidity, apply fair valuation policies, report material issues and execute exits within the agreement. Operational infrastructure, custody controls, conflict allocation and succession plans deserve diligence alongside deal experience.
Formula and assumptions
Specified carry=20%×(realization−returned capital);LP total=realization−carry
Compare with the model response after drafting
- Profit 50 m; carry 10 m; LP total 140 m and net gain 40 m. Annual fee 2 m is not subtracted again because the case explicitly includes it already.
- Approve only after validating the waterfall, expense allocation and business plan; the simplified no-hurdle calculation cannot be applied to an unrelated contract.
Errors to catch
- Double-counting a fee already deducted.
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Original knowledge check
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Sources and coverage status
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