Is it typical for a GP to charge the LPs fees on committed capital after the fund close but before the funds are called for investment? I ask because, without the management fee how does the GP fund the search for the portfolio companies to purchase. As this may take up to 2 years cash flow will obviously be an issue for a new GP. Any thoughts on this would be appreciated.
Thanks
Management fees are generally on committed capital
Thanks for the reply. Is there a typical amount of committed capital that is called (transferred to the custodial account at the fund) at close of the fund that will cover the management fees and associated expenses before the fund closes on any portfolio companies?Is 5% of committed capital reasonable, as this would cover up to 2 years of management fees plus expenses?
Sorry, this is above my pay grade..
2% is typical for management fees, 5% would be outrageous. I'm guessing you're assuming this is a one time check - GP's receive management fees annually over the life of the fund.
The management fee isn't always on committed capital, after the investment period it may be on NAV or invested capital. The fee may also decrease as a % in the later years of the fund. For example, it wouldn't make much sense (for LP's) to be charged 2% on $6B of commitments in year nine when two portfolio companies remain and are being held at $300mm (though GP's wouldn't mind this). Depending on the reputation of the firm or the strategy, management fee terms may demand more or less from LP's.
On top of management fees, other fund expenses can be charged to the partnership (e.g. interest expense, insurance, legal, audit, etc). Advisory and other fees the GP may receive from its portfolio companies can offset some of these additional expenses. The terms of how other expenses will be handled are laid out in the LPA.
Also, GP's aren't starting from $0 at the beginning of each fund, they either have the capital or there is a credit facility in place to cover any initial expenses. In recent years, longer term credit facilities are becoming more commonplace, allowing portfolio companies to be purchased early on and potentially marked above cost by the time capital is even called, among other benefits. This is how some funds are able post massive IRR's right off the bat.
It's not uncommon that a GP will charge a one off establishment fee on the fund close to cover costs in the initial year or so. Also, the GP doesn't have to make investments to call for fees. If it hasn't made an investment in a prolonged period and it needs money to pay the Manager, it can call capital from investors (usually around 1% if this happens) to cover costs in the interim before the next investment. It is, however, common practice to call fees alongside calls for investments because no LP wants to see ~2% of its money being used for paying deal exec salaries etc.
MM PE (Europe): Management fees are called quarterly, at the beginning of each quarter, and will cover all expenses. There was an establishment fee to cover initial set-up costs, but extremely limited (say 1.5 / 2x the quarterly mgmt fee). A small sum (c. 1x the quarter management fee) is also available from the LP as an interest free revolving facility.
In any case, management fee is paid as a percentage of committed capital, and only switches to a percentage of invested capital once the investing period ends and the harvesting/divestment period starts (i.e. after 4-5 years, or once no more capital excl. management fee can be called).
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