Video narration
Why doesn't the $1.5 million split 80/20 right away? Think of a shared pot: first, contributors get their money back. Here, the limited partner, or LP, put in $1 million, so step one returns $1 million. That leaves $500,000. Step two: the preferred return is the LP's priority payout in this example. One million times eight percent equals $80,000. Now $420,000 remains. Step three is the GP catch-up. The general partner, or GP, gets $20,000: $80,000 times 20 percent, divided by 80 percent. That catches the GP up to 20 percent of the $100,000 paid in these two tiers. Now $400,000 remains. Step four: split that $400,000. The LP gets 80 percent, or $320,000; the GP gets 20 percent, or $80,000. So the LP totals $1.4 million, and the GP totals $100,000. Together, $1.5 million. That's why it doesn't split immediately: these example terms set the order. The fund's LPA, its agreement, sets actual payouts.