Carried Interest Question
I’ve been noodling on a carried interest concept, using a $100MM REPE fund as a hypothetical example, and would love some guidance.
If the fund were to target a gross 15% IRR on its combined investments—excluding one-time fund costs of $1MM (1%) and a 2% annual management fee (assuming a 7-year fund life), both paid by the fund—would this be the correct way to approximate the 20% carried interest to the GP, assuming management fees are not recycled?
1. 2.66 estimated gross multiple (1.15^7)
2. $100MM - $1MM (fund costs) - $14MM (cumulative management fees) = $85MM deployable capital
3. ($85MM x 2.66) - $85MM = $141MM x 20% = $28MM carried interest
If this is correct, would total cash flow to the PE sponsor/firm be $42MM (carry plus management fees) over the 7-year fund life?
Thanks!
I think you forgot to calculate the 8% within the carry, but seems about right
Wouldn’t an 8% pref be irrelevant, even with a GP catch-up structure to 20%, since the hurdle would be cleared easily at a 15% IRR?
Multiple responses here:
Thanks, SaaSChimp. Can you perhaps provide an example of the correct math? To me, it is indeed a net calculation, for purposes of calculating the carry, because when an LP makes a commitment, say for $10MM, that’s inclusive of the management fee—i.e., the LP isn’t committing $10MM plus another $200k/year for the management fee.
Infra PE here, not REPE, but that is exactly how it's done at my fund. If an LP commits 100m, they are committing to deploy 100m into investments, and also 1m/year as a management fee (1% p.a of committed capital is what my fund charges). Other expenses do get wrapped into the investment check/get paid out of committed capital, like due diligence fees, transaction fees, etc., but the management fee is on top of committed capital.
If the standard is like you and Zachary say—i.e., no netting if the management fee for purposes of carry calculation—would the only reduction be for fund costs, which are paid out of committed capital?
Example calculation:
Damn, meant to keep it anonymous but oh well.
Not touching carry because I'm too junior to get any (and have never even seen the carry agreement, though my directors tell me the carry is BS anyway).
Management fees for my fund are locked in as per the LPA, if an LP commits $100m for the 10y fund they are liable for $1m per year in direct payment to us for the full 10 years. That said I think this was a concession they gave in exchange for the reduced 1% management fee; market at that time is ~1.5%. The way you described it sounds more reasonable. The management fee is meant to cover our salaries, benefits, inframation subscription fees, etc.
Deal fees are in S&U and are either part of the check we write or are taken as debt on the target's balance sheet. Dead deal fees (DD advisors, transaction documentation, misc. site visit expenses, etc.) are consolidated and billed to the fund alongside the management fee (which is paid twice a year). We front the bill until the next management fee invoice, don't know if this is standard.
On the deal fees, this all sounds very consistent.
Not to bring this thread back to life but is your fund structured such that your carry calculation is on gross MOIC and not net MOIC? I am finding my fund (and other folks in PE) is calculating carry net of mgmt fees (including net MOIC and net IRR for the hurdle rate). These threads had explanations that I find mirrors the way my fund calcs carry pretty closely:
https://www.wallstreetoasis.com/forum/private-equity/why-carry-is-hard-to-realize
https://www.wallstreetoasis.com/forum/private-equity/impact-of-management-fees-on-carried-interest-calculation
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