PE Management Fees for a Mining Deal
Hi all,
I would like to ask a simple question, suppose a Private Equity Fund raises 100 million from Limited Partners (LPs) and then charges 2% management fees and 20% carried interest how does the 2% annual fees really work?
Scenario (Mining Deal)
Year 1;
100 million raised
2% Management Fees charged
Available Capital for project ; 100 - 2 = 98
Project uses all the 98 Million
Year 2;
Project in operation but not yet generating income
Where does the 2% Management fees come from?
The 2% is on capital deployed usually. There will also be a capital committed fee that is lower. The 2% management fees can either be called from LPs or deducted from distributions. In your example, the fund could not call anymore capital because it's already hit its cap, so the fees would just accrue as a liability until proceeds come in. Usually a fund will not use all its capital at the same time (like it'll invest 10% at a time or something) and then they'll still have ability to call capital for mgmt fees. Worth noting that many PE funds do not call 100% of capital.
Thanks a lot CHitizen, please explain what you mean by;
1) Is there a difference between deployed capital and called capital? 2) If the PE Fund does not call 100% of Capital then how does it justify raising the money from LPs assuming it raises funds on a project by project basis?
PE funds make investments over time, so while the fund may have 100M in committed capital, it may only deploy 10-20M at a time. So after, say, 2 years, the fund may be something like 40M deployed and 60M committed but not yet called.
Most PE funds do not raise funds on a project by project basis - this would mostly apply to fundless sponsors. Most PE firms raise a pool of money, then have x years (usually 5) to deploy it and then another 5 to harvest it.
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