When distributing the capital back to the investor, hopefully with an added value, the general partner will allocate this amount based on a waterfall structure previously agreed in the Limited Partnership Agreement.
This structure is designed to encourage the general partner to maximize the return of the fund.
Regardless of whether the waterfall is global or deal-by-deal, this preferred return is always calculated on every cashflow.
The target ratio may also be calculated in different ways: Carried interest is a simple allocation of the remaining amount between LP and GP.
A GP may decide to define many hurdle rates, each linked to a specific allocation.
In this case, the higher hurdles are linked to allocations more favorable to the general partner.
In August 2010, Blackstone Group returned $3 million in carried interest to the limited partner of a fund as part of a clawback provision.