Now we have to apply the mechanism of carried interest management fee to a real example. We’ll consider the story of a closed-end fund managed by an AMC that could be very useful to understand how does it work, the mechanism of sharing profit between managers and investors. Lets start with some inputs. First of all the first input is related to the amount of management fee. Let's imagine the management fee is 2%. The hurdle rate is 8%, the current interest is 30%. The committed capital, which is the size of the closed-end fund, is 400 million euros. And last, the percentage of the managers is 2%. It's 2% because we are in Europe, it's an AMC in Europe, so 2% is mandatory by law. If you move to the US and/or UK, managers, as you remember, have to invest 1%. To apply the formula of carried interest and to calculate what's the return for both for the managers and for investors. We need numbers related to the development of investment for the closed-end fund. You have a table in which you find 11 years of results. Why 11 years? You know that the maturity of a closed-end fund is ten years, but it's up to the managers to decide if it makes sense to use other three years maximum to run the investment. In this case the assumption is that managers decided to use only one year. You'll find different lines. The first line is a line where you find a drawdown. Drawdowns are a position as a requirement by law in the three years. In the first year 100 million Euros. In the second year 200 million Euros, and in the third year another 100 million euros. In the second line we find the investments. In year 1, the closed-end fund immediately starts investing money, and we have investments until year number 9. We don't have investment in the year 10 and 11 because in the year ten and 11, managers have to be focused on exiting the investment. The line number three represents divestment. Divestment means to manage the exit of all the deals. In this case in the first two years, we don't have exits, so we don't have divestments. Starting from year number 3 to year number 11, we have divestments. Line number four is represents management fee, management fee is at 2%. The size of the closed-end fund is 400 million Euros, that means that every year, managers receive 8 million Euros from the closed-end fund. The fifth, the last line, represents by the amount of cash. That's quite relevant because in year 11, the final amount of cash represents the final amount of the closed-end fund. That means in this closed-end fund, we started with 400 million Euros, and in year 11, managers decided to close the closed-end fund and the amount of money they have in cash is 1,792 million Euros. Now the issue we have on the table is sharing this amount of money, this huge amount of money, between the managers and the investors. To do that, we have to apply the concept of carried interest. What we have to discover today is that carried interest, even though the formula is always the same, can be applied into two different ways. This is a golden rule in the market. The first way is the so-called global IRR approach. The second way is the so-called yearly IRR approach. Let's start with case one, which is the global IRR approach. In the global IRR approach, first of all, we have to calculate the global IRR of the fund. The formula we have to use is global. That means that we have to calculate the difference between the final amount of money, so 1,792 million Euros, minus the committed capital, 400, divided by the committed capital, 400 million Euros. That means that the return of the fund is 348%. Minus the other rate, it means that the net global IRR is 340%. If we multiply by the carried interest, which is 30%, it means that the carried interest is 102%. Now we have to transform this percentage. 102% into an amount of money where the amount of money's for the managers. The rule is to calculate the return, again, on a global basis of 400 million Euros. And if we multiply 400 million Euros by 102%. The result is 408 million Euros. This is the amount of money for the managers. The difference between 1,792 million and 408 million Euros is the amount of money for the investors. If you want, we can also calculate what would be the yearly return both for the managers that, at the end of the day, invested the 2% of the 400 million Euros and for the investors that invested 400 million Euros. This is the first case. But we can also calculate the carried interest using case two, which is the yearly IRR approach. In this case, the beginning of the story is the same. We have to calculate the global IRR of the funds, but we don't calculate it using the global approach. We calculate it using just simply the IRR concept. And you can see that the return in this case is 16.2%. If we calculate, obviously, the net yearly IRR, the net yearly IRR is 8.2%. If we multiply 8.2% by 30%, we have what is the amount of return for the managers, and in this case, it is 2.45%. Now we have 2.45% of return for the managers, and applying the IRR again, we have to calculate what is the amount of money. Obviously, the amount of money will be lower compared to the first case, and the amount of money will be around 122 million Euros. A lot of money, but a lower amount compared to the first case. The amount of money for the investors will be, again, the difference between 1,792 minus all around 122 million Euros. As it happens, in the first case, if you want, and you can see in the tables in the Excel file you have in your hands, it's possible also to calculate what is the yearly return both for the managers and for the investors. In both cases we apply the formulas without catch up. That means the carried interest is calculated on the difference between the final IRR and the hurdle rate. It's possible also to calculate the same results with catch up, and in this case, the carried interest is calculated, not on the difference, but just simply on the amount of the IRR of the fund. The condition to do that, obviously, is that the return of the fund is bigger than the hurdle rate itself.