Catch-Up Provision

A catch-up provision is a clause often used in real estate and private equity fund agreements. It usually comes into play after investors receive their return of capital and preferred return (if applicable).

The catch-up provision is designed to allow the fund manager or general partner (GP) to "catch up" on profit distribution once the limited partners (LPs) have achieved their preferred return.

For instance, if the profit distribution agreement includes an 80% LP/20% GP split after the preferred return, the catch-up provision might state that the next portion of profits will be distributed 100% to the GP until the overall profit distribution matches the agreed-upon split (say 80% to the LPs and 20% to the GP).

Here is a simple example: Let's assume there's an 8% preferred return and an 80/20 split with a catch-up provision.

The first profits go to repay the initial investment of the LPs.

The next profits provide an 8% return to the LPs.

Then the catch-up provision kicks in: the next profits go entirely to the GP until the overall profit split (including the preferred return) is 80% to the LPs and 20% to the GP.

Finally, any further profits are split 80/20 between LPs and the GP.

This mechanism ensures that the GP receives a larger portion of the profits after the LPs have achieved their minimum desired return. As with any contract terms, the specifics of a catch-up provision can vary widely based on the individual agreement.