I have some questions on how funds are structured to pay out LPs and GPs. I also posted this in PE forum bought thought some Hedge Fund guys might have insight as well.
Do preferred rates pay off total invested capital or off total invested capital less the placement fee. For example, if there is a 5% placement fee on a 1 million dollar investment, does the preferred rates pay off the $1 million or 950K.
Is everything going forward based off the $1 million or the $950K
Assume a 8% preferred and a 60/40 split there after. Year 1 has a 20% return off of $1 million. So 200k for distribution. 8% preferred gets 80k. Then the 60/40 splits are 72k and 48k. Does that 72k get paid out as a divided, and the investor base investment remains at $1 million or does that 72k reduced the based investment. Basically, does the money distributed over the preferred rate go to paying down the investment or is it just an additional return.
Or is the above example wrong and that the managers don't touch a cent until the entire invested capital is paid back.
Basically, I'm not really sure how the flow of funds works in a fund structure. Can anyone that knows explain it
