Just learning finance on my own. Would appreciate if anyone can throw some light on the business model of 2 and 20 of Private Equity firms.
Assume XYZ firm, a PE, raises $100 from investors, takes a 2% cut (of AUM) to take care of its internal operations. XYZ then invests $90 in 3/6 private companies (all unlisted). The cash which can still be invested is 100-2-90= $8
In Year 2, XYZ again charges 2% of its management fee and since it hasn't made any exit, 20% cut isn't charged.
I would like to know on what is the 2% management fee is charged? $98 or $90 or $8?
In the case, 2% is charged on $90, I would like to argue that since the stakes are in unlisted entities they can be hard to value to arrive at the AUM figure.