Majority of CVs See Both Tiered Carry and Dual Return Metrics – Morgan Lewis

Why It Matters

Dual‑metric tiered carry ties GP compensation to both speed and magnitude of returns, reshaping LP‑GP negotiations and potentially enhancing fund valuations across the secondary market.

Key Takeaways

• Over 50% of CVs now use tiered carry with IRR and MOIC thresholds
• Dual metrics align GP incentives with cash‑flow timing and total multiple
• LPs increasingly demand performance‑based fee structures
• Complex waterfalls may raise advisory and reporting costs
• Trend suggests broader adoption of sophisticated waterfall models

Pulse Analysis

Continuation vehicles have become a cornerstone of the private‑equity secondary market, allowing limited partners to extend ownership in mature assets while providing new capital for growth. Originating as a liquidity solution, CVs now account for a sizable share of secondary transactions, driven by investors seeking to capture upside in high‑performing portfolios without full exits. As the market matures, sponsors are refining fee structures to meet sophisticated investor expectations, prompting a reevaluation of traditional carried‑interest models.

The Morgan Lewis study highlights a pivotal evolution: more than half of CVs now embed tiered carry clauses that activate only when both IRR and MOIC benchmarks are met. By coupling a time‑based return metric (IRR) with a value‑based metric (MOIC), sponsors can reward themselves for delivering rapid cash returns while also ensuring long‑term value creation. This dual‑metric approach mitigates the risk of front‑loaded distributions that inflate IRR but neglect total multiple, thereby offering a more balanced incentive framework that resonates with limited partners focused on holistic performance.

For the industry, the rise of dual‑metric tiered carry signals heightened negotiation complexity but also greater alignment of interests. Investors can demand clearer performance thresholds, while general partners gain flexibility to structure compensation that reflects both speed and scale of returns. As reporting standards evolve and data analytics improve, we can expect even more granular waterfall designs, potentially incorporating hurdle rates tied to ESG outcomes or co‑investment participation. Firms that adapt early will likely secure stronger LP relationships and command premium valuations in an increasingly competitive secondary market.