[5] Private equity funds typically have a lifetime of 10 years, in which the first 5 years are the investment period (on

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5 Private Equity Funds Typically Have A Lifetime Of 10 Years In Which The First 5 Years Are The Investment Period On 1 (61.14 KiB) Viewed 34 times

[5] Private equity funds typically have a lifetime of 10 years, in which the first 5 years are the investment period (only in new investments) and the last 5 for follow-on investments and in exiting portfolio companies. The management fees to be paid to the General Partners are typically assessed using 1 of the following 4 methods: (0) a constant percentage of committed capital; (ii) a decreasing fee schedule with the percentage falling by 0.25% per year after the investment period (after year 5); (iii) a constant rate for the first 5 years with committed capital basis and the same percentage with invested capital basis in the last 5 years; (iv) a combination of methods (ii) and (iii). Suppose a PE fund has $100 million in committed capital and its base rate for management fees is 2%. It has invested in 10 companies during the first 5 years and begins to exit the investments in year 6 at a pace of 2 exits per year until the end of year 10, when all investments have been exited. Assume the original cost of basis for investment is $10 million each and the fees are calculated on the net invested capital based on year-end balances (that is after the payment of management fees). How much in lifetime management fees does the PE firm earn, based on EACH of the 4 methods described above?