Preferred Equity in Carried Interest Waterfall
Thought this was straightforward but been hearing from others it may not be:
Example: $100 invested in Year 0 and $100 returned in Year 1. At that point in time there is $8 pref balance based on 8% pref terms. Does the pref balance become locked because 100% basis has been returned or if no capital activity occurred, would year 2 result in an $8.64 pref balance?
The former would result in potential for carry to be taken when IRR is below 8% which I thought was not intent but some places may be treating this way.
please let me know your thoughts from own knowledge or experiences. I don’t believe most pref language calls this out in waterfall so wondering what is standard.