If an interviewer asks you to compare the return on fund capital against the return on co-investment capital in the same deal, the answer follows a fixed sequence: work out the equity ownership split, calculate the exit equity value, derive the gross MoM and IRR that every participant shares, then strip out the management fee and carried interest that only fund capital pays. In the worked example below, a deal that returns 2.61x gross delivers 2.21x net to an LP inside the fund but a full 2.61x on the fee-free co-invest — a gap of roughly 400 basis points of IRR on identical assets.

This article walks through that calculation step by step, then covers the variations interviewers use to test whether you have actually understood the mechanics. The full version with tables, follow-up questions and a model answer is the case study Club Deals and Co-Investments. If you need the conceptual background first — why sponsors club together, how governance is shared, where GP/LP alignment breaks down — read what a club deal in private equity is before working the numbers.

The Setup You Will Be Given

A typical prompt gives you a club deal and asks you to compare outcomes for different pools of capital. Our example: two mid-market sponsors acquire a German industrials business at 8.0x an entry EBITDA of EUR 100.0m, so an enterprise value of EUR 800.0m. Add EUR 20.0m of transaction and financing fees and total uses are EUR 820.0m, funded with EUR 460.0m of debt and a EUR 360.0m equity cheque.

That equity is syndicated three ways: EUR 162.0m from the lead sponsor's fund, EUR 126.0m from the second sponsor's fund, and EUR 72.0m from a co-investment vehicle assembled for the lead sponsor's limited partners. After five years the business exits at 8.5x an EBITDA of EUR 140.0m with EUR 250.0m of net debt remaining.

One LP has EUR 100.0m of exposure to the transaction, split evenly: EUR 50.0m through its commitment to the lead sponsor's fund, and EUR 50.0m through the co-investment vehicle. The fund charges a 2.0% annual management fee on invested capital, an 8.0% preferred return compounded annually, and 20.0% carried interest under a European waterfall with full catch-up. The co-investment vehicle charges nothing. Being able to reconstruct a capital structure like this from a verbal prompt is a core skill in itself — the paper LBO case drills exactly that.

Step 1: Calculate the Equity Ownership Split

Ownership % = Participant Equity Cheque / Total Equity Cheque.

The lead sponsor's fund takes 162.0 / 360.0 = 45.0%. The second sponsor takes 126.0 / 360.0 = 35.0%. The co-investment vehicle takes 72.0 / 360.0 = 20.0%.

This is arithmetic, but say out loud what it implies: because all three hold the same instrument and rank pari passu, the ownership percentage is also the exact share of exit proceeds. There is no preference, no ratchet and no priority between the participants. Management usually sits outside this stack in a separate sweet equity instrument, which is where ratchets and hurdles do appear — see the management incentivisation and ESOP case for how that layer is built.

Step 2: Calculate the Exit Equity Value

Exit Equity Value = (Exit EBITDA × Exit Multiple) − Net Debt at Exit.

Exit enterprise value is EUR 140.0m × 8.5 = EUR 1,190.0m. Subtract EUR 250.0m of net debt and the equity value at exit is EUR 940.0m.

Three levers produced that outcome simultaneously: EBITDA grew from EUR 100.0m to EUR 140.0m, the multiple expanded from 8.0x to 8.5x, and debt fell from EUR 460.0m drawn at close to EUR 250.0m net at exit. Candidates frequently forget the third one, because deleveraging happens quietly through the debt schedule rather than through a headline assumption. The mechanics of that paydown are set out in the LBO debt schedule case, and the effect of the multiple is isolated in entry and exit multiple.

Step 3: Derive the Gross MoM and Gross IRR

MoM = Exit Proceeds / Equity Invested. IRR on a single-cash-flow-in, single-cash-flow-out deal simplifies to MoM^(1 / years) − 1.

Across the whole club: EUR 940.0m / EUR 360.0m = 2.61x, and 2.61^(1/5) − 1 = 21.2%.

The important observation, and the one interviewers are listening for, is that this is identical for every participant. The lead sponsor's EUR 162.0m becomes EUR 423.0m, the second sponsor's EUR 126.0m becomes EUR 329.0m, and the co-investment vehicle's EUR 72.0m becomes EUR 188.0m — all at 2.61x and 21.2%. The deal does not discriminate. Every difference in what participants ultimately keep comes from the fee and carry layer above the asset, never from the asset itself. If the single-period IRR shortcut is not yet second nature, work through the MoM and IRR calculation case first, because the rest of this analysis assumes you can do it in your head.

Step 4: Strip Out the Management Fee

Cumulative Management Fees = Fee % × Invested Capital × Holding Period.

On the LP's EUR 50.0m of fund capital: 2.0% × EUR 50.0m × 5 years = EUR 5.0m. Its gross proceeds of EUR 50.0m × 2.6111 = EUR 130.6m therefore fall to EUR 125.6m of pre-carry proceeds.

State your fee convention explicitly, because it is a genuine ambiguity and interviewers respect candidates who flag it rather than glossing over it. Fees can be charged on committed capital during the investment period and on invested capital afterwards; they can be drawn separately from the LP or netted out of proceeds; and many funds apply a step-down in the later years. We have assumed the simplest convention — 2.0% on invested capital for the full five years, settled at exit. A different convention changes the number, not the logic.

Step 5: Calculate the Carried Interest

This is the step where most candidates lose marks. Carried interest is not simply 20% of everything above the hurdle, and it is not 20% of gross proceeds either. It is 20% of distributable profit, arrived at through a waterfall.

Distributable Profit = Pre-Carry Proceeds − Invested Capital = EUR 125.6m − EUR 50.0m = EUR 75.6m.

Preferred Return = Invested Capital × [(1 + hurdle)^n − 1] = EUR 50.0m × [(1.08)^5 − 1] = EUR 50.0m × 0.4693 = EUR 23.5m.

Note that 8.0% compounded over five years is 46.9% of capital, not 40.0%. Using a simple rather than compounded hurdle is one of the most common errors in this calculation, and it flows through to the wrong carry number.

Because distributable profit of EUR 75.6m comfortably exceeds the preferred return of EUR 23.5m, the hurdle is cleared and the catch-up runs to completion, so the GP ends up with a clean 20.0% of profit. The four tiers run as follows: the LP first receives its EUR 50.0m of capital back; then the EUR 23.5m preferred return; then the GP catches up with EUR 5.9m (100% of distributions until the GP holds 20% of profit distributed, so EUR 23.5m × 20/80); then the remaining EUR 46.2m splits 80/20, giving the LP EUR 37.0m and the GP EUR 9.2m.

Total carried interest = EUR 5.9m + EUR 9.2m = EUR 15.1m, which is exactly 20.0% × EUR 75.6m. The catch-up tier exists precisely so that the GP ends up with its full 20% of all profit rather than 20% of profit above the hurdle — a distinction worth stating explicitly in an interview. The full mechanics, including clawback and the difference between European and American waterfalls, are covered in the PE waterfall and carried interest case and in our detailed guide to calculating carried interest and clawback.

Step 6: Compare Net Fund Returns to Co-Investment Returns

Net Proceeds to Fund LP = Pre-Carry Proceeds − Carried Interest = EUR 125.6m − EUR 15.1m = EUR 110.4m.

Net MoM = EUR 110.4m / EUR 50.0m = 2.21x. Net IRR = 2.2089^(1/5) − 1 = 17.2%.

On the co-investment side there is nothing to strip out. Net proceeds are EUR 50.0m × 2.6111 = EUR 130.6m, a net MoM of 2.61x and a net IRR of 21.2%.

Blended across the LP's full EUR 100.0m of exposure: (EUR 110.4m + EUR 130.6m) / EUR 100.0m = 2.41x, and 2.41^(1/5) − 1 = 19.2%.

Summarise the result in one sentence, because that is what the interviewer wants: the fee and carry drag is EUR 5.0m of fees plus EUR 15.1m of carry, together EUR 20.1m, or about one-sixth of the profit; splitting exposure evenly between fund and co-invest recovers roughly 200 basis points of IRR and 0.20x of money on an unchanged asset.

The Variations Interviewers Use

Half-and-Half Co-Investment Terms

Increasingly GPs charge something on co-invest. On half-and-half terms — 1.0% fee and 10.0% carry — the LP's EUR 50.0m co-invest pays EUR 2.5m of fees, leaving EUR 128.1m pre-carry and EUR 78.1m of profit, of which the GP takes 10.0%, or EUR 7.8m. Net proceeds are roughly EUR 120.3m, a 2.41x net rather than 2.61x. Blended across the full EUR 100.0m, the LP lands at about 2.31x and 18.2% rather than 2.41x and 19.2%. Roughly half of the co-investment benefit survives — which is the entire point of the structure from the GP's perspective.

What Happens if the Hurdle Is Not Cleared

Change the exit multiple to 5.0x and the picture inverts. Exit enterprise value becomes EUR 700.0m, equity value EUR 450.0m, and the gross MoM falls to 1.25x. The LP's EUR 50.0m of fund capital returns EUR 62.5m gross, less EUR 5.0m of fees, so EUR 57.5m pre-carry and only EUR 7.5m of profit — well below the EUR 23.5m preferred return. No carried interest is paid at all. The LP nets 1.15x through the fund versus 1.25x on the co-invest.

The lesson is that fee drag is constant while carry drag is contingent. In a weak deal the management fee is the whole story, and it hurts proportionally more precisely when returns are poor. That asymmetry is worth naming, because it is one of the strongest arguments LPs make for co-investment.

European Versus American Waterfall

Our calculation used a European, whole-of-fund waterfall, where the GP receives carry only after all LP capital and the preferred return across the entire fund have been repaid. Under an American, deal-by-deal waterfall, the GP would take carry on this deal as soon as it exits, regardless of how the rest of the portfolio is performing. On a single deal in isolation the total carry is the same; the difference is timing and risk, which is why American waterfalls come paired with a clawback obligation and, usually, an escrow.

Transaction and Monitoring Fees

A thorough interviewer may ask about deal fees paid by the portfolio company to the sponsor. Most modern LPAs require 80–100% of these to be offset against the management fee, so they rarely change the LP's net materially. But co-investors typically do not share in fee offsets, since they pay no management fee to offset against — a small point that signals you have read a real LPA.

Common Mistakes to Avoid

  • Quoting a gross deal IRR against a net fund IRR without labelling which is which. In this example they differ by roughly 400 basis points.
  • Assuming the co-investor earns a different gross return. All club equity ranks pari passu; only the fee layer differs.
  • Skipping the GP catch-up tier, which understates carried interest and overstates the LP's net proceeds.
  • Using a simple rather than compounded preferred return — 46.9% of capital over five years, not 40.0%.
  • Applying carry to gross proceeds instead of to distributable profit after fees and return of capital.
  • Forgetting that management fees are charged on the LP's committed or invested capital, not on the deal's total equity.

How to Practise This

Work the full structure end to end in Club Deals and Co-Investments, which includes the complete waterfall table, the blended return comparison and four follow-up questions on governance, deadlock and debt documentation. Then pressure-test the surrounding skills: MoM and IRR for the return arithmetic, the PE waterfall for the distribution mechanics, and writing an investment thesis for the qualitative half of a co-investment decision, which an LP has to make in two to four weeks on a partial diligence pack.

The candidates who handle this material well are not the ones who memorise the formulas. They are the ones who can say, in a single sentence, why the same asset pays two different investors two different amounts — and then produce the numbers to prove it.