Private Equity Business Model
How are most private equity firms compensated? I know they will occasionally invest in their own funds. Do they charge their stakeholders a flat annual fee plus keep a percentage of investment performance (similar to HF's 2%, 20%)? Or do they charge a management fee as a percentage of invested assets?
Thanks
hedge funds, charge a management fee plus take a portion of profits. They pay themselves well, although its not necessarily the 2/20% rule of most HF's, some take 25-40% of profits realized once the asset is liquidated (Bstone, Bain, etc). Also, usually management fee charged after funds have been invested (i.e. buyout occurs), plus many pay themselves a M&A fee and an on-going management fee charged to the portfolio company.
2/20 is the norm, and I believe that the 2% management fee is on committed capital rather than invested capital.
Also, the 20% carry is generally above a certain return threshold (on a deal-by-deal basis, not over the entire fund)
Some funds (Bain, Golden Gate, Providence until recently) take more than 20% carry, but no one (LPs) would pay away 40% of the upside, unless it was only above a really high return threshold.
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