Question on hurdle rates
I never worked in PE, went straight to HF out of undergrad. Have some opportunities on the private side doing crossover and wanted to ask the mechanics of a hurdle rate for PE funds. Very few HFs have it and it seems to be structured differently for HFs anyway.
Only HF (big recent launch) I know who has it is structured like this:
hurdle rate is 5% net of management fees, get 20% incentive fee above 5% and below 15% and a 30% incentive fee above 15%, on top of management fee etc.
So lets just say they manage $1B and return 10%
$1,000 * 10% = $100 performance for the fund
Management fee lets call 1%, so $1,000 * 1% = 10
Performance Fee is $100 - $10 = $90, $90 - 5% hurdle rate(50) = $40 in performance eligible for the fee, $40 *20% = $8 in performance fees
So all in, the GPs get $18MM in fees and the LPs net 8.2% or $82MM on the $1B
Is this the same mechanics for a PE fund or is it set so that if you hit the hurdle rate, ALL performance is eligible for the 20% fee?
Read some articles on GP catch up fees etc and understand it now. Linking article for those who also were confused.
https://www DOT efinancialcareers.co.uk/news/finance/small-chart-explaining-people-work-private-equity-well-paid
It's extremely rare for firms to actually charge 2/20 in PE because LPs get fee breaks for early/anchor commitments during fundraising or large commitments. But let's assume the firm still gets 2/20 for the sake of your question. Most common PE fund hurdle is 8% and that is calculated using your gross return minus management fees (~2%) minus other fund expenses (~50bps). So if they clear the 8% hurdle, then the fund is "in the carry" and will earn 20% performance fees on the (gross return minus mgmt fees minus other fund expenses). Then the carry distributions will vest over time for retention purposes.
Okay that's helpful pertaining to fee discounts. So they are actually only getting the perf over the gross - management - expenses in most cases then?
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