Realized gains are the actual profits a fund earns from exiting investments. When a general partner sells a portfolio company, takes it public, or receives proceeds from a recapitalization, the difference between exit proceeds and the original investment cost is the realized gain (or loss). Unlike unrealized gains, realized gains represent locked-in profits that flow through to distributions and ultimately into LP accounts.
The Calculation
Realized gain on an individual investment is straightforward:
Realized Gain = Total Exit Proceeds - Cost Basis
If a fund invested $15 million in a company and sold it for $60 million, the realized gain is $45 million. If the company was sold for $8 million, the realized loss is $7 million.
At the fund level, cumulative realized gains net of realized losses across all exited positions determine how much profit the fund has actually generated. This feeds directly into the distribution waterfall and determines when carried interest begins accruing to the GP.
Why Realized Gains Are the Hardest Metric to Argue With
In a world where NAV estimates are subjective and IRR can be inflated by subscription lines, realized gains are concrete. Cash has changed hands. A buyer has paid a price. The gain is real.
This is why sophisticated limited partners weight realized performance heavily when evaluating a GP’s track record. A fund with $200 million in realized gains from exited positions provides a fundamentally different evidence base than one with $200 million in unrealized gains based on quarterly marks.
Realized Gains and the Distribution Waterfall
Realized gains are the engine that drives LP distributions. In a typical distribution waterfall:
- Return of capital. Exit proceeds first go to return contributed capital to LPs.
- Preferred return. LPs receive their preferred return, typically 8% annually on contributed capital.
- GP catch-up. The GP receives a catch-up allocation to reach their carried interest share.
- Carried interest split. Remaining profits are split, typically 80% to LPs and 20% to the GP as carry.
The waterfall structure determines how realized gains are allocated. In a European (whole-fund) waterfall, the GP earns no carry until the entire fund has returned capital plus preferred return. In an American (deal-by-deal) waterfall, carry can be earned on individual deal gains, subject to clawback provisions.
Analyzing Realized Gains Across a Portfolio
The pattern of realized gains across a fund’s portfolio tells you a lot about a GP’s investment approach:
- Concentration. If 80% of realized gains come from one or two exits, the GP may be a concentrated bet-taker or may have gotten lucky. Wide dispersion of gains across many deals suggests repeatable skill.
- Loss ratio. What percentage of investments produced realized losses? Even top-performing funds have write-offs, but the ratio matters. Buyout funds typically target loss ratios below 10-15% of invested capital.
- Realized vs. unrealized. Comparing cumulative realized gains to current unrealized value shows how far along the fund is in converting paper performance to actual results. A fund with a long track record of converting unrealized into realized gains at or above carrying value builds confidence.
Realized Gains in Fundraising
When raising a new fund, GPs should present realized gains with full transparency: deal-by-deal entry and exit values, hold periods, and the ratio of exit proceeds to last reported NAV. This realization analysis is one of the first things institutional LPs request in due diligence because it validates that the GP can not only create value but actually capture it through execution.
Frequently Asked Questions
How are realized gains different from distributions?
Realized gains are the profit component of an exit: proceeds minus cost basis. Distributions to LPs include both the return of invested capital and any profits, minus the GP's carried interest and expenses. A $30M exit on a $10M investment produces $20M in realized gains, but the distribution to LPs is the full $30M (less carry and expenses), which includes both the $10M return of capital and the $20M gain.
When do realized gains trigger carried interest?
Carried interest is typically calculated on realized gains after LPs have received back their contributed capital plus the preferred return (usually 8% IRR). In a deal-by-deal carry structure, carry may be triggered on individual exit gains. In a whole-fund (European) waterfall, carry is only paid after the entire fund has returned capital plus preferred return. The specific trigger depends on the fund's distribution waterfall terms.
Can a fund have realized gains but still be underwater?
Yes. A fund can have profitable exits generating realized gains on specific deals while the overall fund is still below a 1.0x multiple if other investments were written off or marked down significantly. This is common in venture capital, where a portfolio might have several zeros alongside a few strong exits.
