I'm aware the PE funds typically charge management fees on all committed capital from day 1. Is there ever a point at which the basis for the management fees goes up or down? Specifically I'm looking at a fund where they're fully invested 5 years in, but the M2M on their investments is at best 50% of the fund cost basis. One Co has already filed BK, and 2 are teetering. Is there ever a point at which they'd take a smaller management fee?
In addition, I'm aware that this fund has structured a carry on each individual investment - ie fund plus co-invest owns class A equity, and fund owns class B pref equity that distributes like a promote. I assume the fund wouldn't have a fund level promote as well? But I also assume even if they return less than 1X ROIC on a fund basis, but do hit one homerrun, they'll get that promote at the portco level? What a world.
Interesting I met an investor just last week and he asked if our fees are decreasing and I really couldn't understand why he wanted the fees to decrease and we quickly went onto the next agenda item.
Anyone here got some light?
Does anyone know why I was asked if my fees are decreasing?
I think usually the management fee drops from 2% to 1% after the capital is called, but you make it up from charging the portfolio companies 1% of equity in management fees.
Our case was raise 500M as a listed project (Special Purpose Acquisition Company)
Deduct 50M at the start (Take 10M per annum for 5 years as fees) Yr 1 invest 225 M Yr 2 invest the other 225M
I have heard of SPACs returning back their money because of having poorly thought out the fee structure. Takers?
Portfolio company fees are usually (always) netted out of management fees.
Also, your fee structure incentivizes firms to not put capital to work. If they just sit on unfunded they get paid more...
What do you mean incentivizes firms to not put capital to work. The slight difference is that this is a SPAC and hence the firms are also investing in the management team.
Typically Private Equity will be something like:
Capital commitments of 500M Call 10M per annum as management fees Yr 1 call 250 M Yr 2 call 250M ?
Sounds like a terrible fund.
Mgmt fee basis will drop to net invested cost after either the investment period expires (5-7 years), or a successor fund is raised, whichever comes first.
Even if the fund has deal-by-deal carry, there should be a fund level preferred as well. This is how funds get into heavy clawback issues with early winners followed by losers.
Please elaborate more I don't understand what you mean by fee basis dropping to net invested cost. Convince me that the fund is terrible
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