The Model Every Fund Must Show LPs

An LP commits capital to a private equity or venture fund for roughly ten years. Before the check clears, they want one answer: if I invest, what do I get back, and on what terms?

Why it matters: The Limited Partnership Agreement sets the economics in words. The model sells them. A fund's waterfall, carried interest, and pro-rata investor cash flows are a simulation of how a GP deploys and returns capital, built to convince someone to lock up money for a decade.

• A track record from a prior fund outweighs any pro forma once due diligence starts.

• But the model is still required. It shows an LP that the GP has thought about deployment and value creation, not just raising.

I built the model below years ago, when I wanted to understand the capital-raise math from first principles.

The whole fund on one page

The waterfall is the engine. Three vintages deploy over Years 1 to 3. Management fees run at 1.5 per year. A hurdle accrues before the GP earns a cent, and carried interest comes out only at the end.

The headline is two numbers.

Between the lines: the seven-point gap between gross and net is the price of the GP. That is where management fees and carried interest land, and it is the first thing a sharp LP pressure-tests.

What the LP sees

Every LP scales the fund down to their own check. On a $10m commitment at a 10% pro-rata share, the fund's cash flows become the investor's: money out in the early years, distributions once exits land in Years 6 to 8.

Where the return comes from

One bridge explains the whole thing. Value creation, not leverage or fees, drives the number.

The bottom line: 100 invested becomes 340 gross and 276 net. The value-creation bar is the pitch. Everything else is mechanics an LP already knows.