A typical Indian AIF or PMS charges a management fee - commonly 1-2.5% a year - plus a performance fee, or carry, usually 15-20% of profits once returns clear a hurdle rate typically set between 8% and 12%. Read as “20% carry above a 10% hurdle,” most investors assume the manager only ever shares in the return above 10% - the investor keeps the first 10% outright and splits the rest 80/20. That is only true if the fund’s specific structure has no catch-up clause.
A catch-up clause changes what the manager’s fee is calculated on. Instead of stopping at the excess over the hurdle, it lets the manager take 100% of profits in a narrow band right after the hurdle clears - until the manager has recovered a full 20% share of the entire return, not just the part above 10%. Only past that point does the standard 80/20 split resume.
Run the numbers on a 10% hurdle and 20% carry, with a full catch-up:
- Catch-up threshold: hurdle ÷ (1 - carry) = 10% ÷ 0.8 = 12.5%.
- 0% to 10% gross return: investor keeps all of it.
- 10% to 12.5%: the manager keeps all of it - the catch-up zone.
- Above 12.5%: split 80/20, investor/manager, as usual.
Investor’s net return as a function of the fund’s gross return, with and without a full catch-up clause, at a 10% hurdle and 20% carry.
On a 15% gross return, a fund with no catch-up clause charges a fee of 20% × (15% - 10%) = 1.0 percentage point; the investor keeps 14.0 of the 15%. The identical fund terms with a full catch-up clause charge 2.5 points in the catch-up zone plus 20% × (15% - 12.5%) = 0.5 points above it - a 3.0-point fee, exactly 20% of the entire 15% return, precisely what the catch-up clause is designed to guarantee the manager. The investor keeps 12.0 of the 15% instead of 14.0 - three times the fee, off the same headline “10% hurdle, 20% carry.”
Many Indian AIFs skip the catch-up clause entirely - in that structure, the manager only ever earns carry on the profit above the hurdle, and the investor keeps the full hurdle return plus 80% of everything beyond it. SEBI does not mandate or cap either version; both are commercially negotiated and disclosed in the fund’s private placement memorandum. “10% hurdle, 20% carry” describes both structures equally well and distinguishes between them not at all.
None of this argues against catch-up clauses - paying a manager on total performance rather than only the slice above an arbitrary hurdle has its own logic. It means the two numbers investors usually compare across funds, hurdle rate and carry percentage, are not sufficient on their own. Whether a fund’s effective fee looks like 14% kept or 12% kept, on the identical gross return, is decided by a single clause that rarely makes it into the marketing material.
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