PE calculation question
This is actually for a class i'm taking.
What does 1 point in carry and 1 point in deal expenses mean? I know what carry is, but is 1 point like 1% or 0.1% or what? If so, what is it % of? What is the expense % out of?
Thanks.
I believe you probably mean deal fees. One point of carry would mean 1% (at least that is the way the terminology goes at my firm) and my assumption would be that 1 point of deal fees would mean that you would collect one point of any deal fees collected on a deal you were working on. Many PE firms will charge companies a "deal fee" for structuring and managing the transaction just like an investment bank would. The one point would be 1% of those fees. At least that is my understanding, someone please correct me if I am wrong.
I see, so 1 point is 1 % right? So carry would be out of the return, and expenses will be out of the initial fund raised?
thanks.
When people say "points" they mean basis points, i.e. .01 or 1.0%. On deal expenses it depends, typically the fund will charge the target a fee for expenses incurred for undertaking the transaction, although sometimes fees come out of the fund. If we are talking about an LBO most likely the target is charged, if it's a minority growth or vc investment there's a better change the fund is charged.
You're wrong, illcaprice. That is NOT what people mean when they say basis points. Why invent a two word phrase for a meaning already captured by a single one? Please refer to: http://en.wikipedia.org/wiki/Basis_point.
You're absolutely right. My bad, too many beverages last night.
Just to clarify for those who didn't click on the link, a basis point is actually 0.01%, not 1.0%. 100 basis points is 1.0%. It's unlikely that you'll have only 1 basis point in deal expenses or deal fees. 1% is much more realistic.
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