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?

You can answer this is a few parts.
You have committed capital (dry powder) and what I would call deployed capital.
The entity would generally charge the management fee on committed capital (pay for research, staff, office space etc..)
From here then you get into the distribution waterfall.
We can then break the return down into multiple pieces:
Return of Capital
Preferred Return - Where return/cash-flows goes to the investor (LP) until a specific return is reached. After preferred return is reached there is then a break-down between LP and GP.

Catch-Up
Carried Interest
These private equity deals are generally cash-flow dependent where IRR is used (still questionable on if IRR is best)
Just some high level points here... but there are excel models available on the web that show examples of the waterfall distributions.

In practice, the PE firm would not invest the full amount of the fund.  To avoid the situation you outline, they would typically reserve about 10% of the fund to call for management fees (2% * five year investment period).  Actually, they will typically reserve more than this, to save dry capital for any follow on investment investments.

The fund would expect to have realizations starting in year 3 or 4 and would use some of the proceeds of the realizations to pay for subsequent management fees.

In practice, the PE firm would not invest the full amount of the fund.  To avoid the situation you outline, they would typically reserve about 10% of the fund to call for management fees (2% * five year investment period).  Actually, they will typically reserve more than this, to save dry capital for any follow on investment investments.

The fund would expect to have realizations starting in year 3 or 4 and would use some of the proceeds of the realizations to pay for subsequent management fees.

Our case was raise 500M as a listed project (Special Purpose Acquisition Company)
Deduct 50M at the start (Take 10M per annum for 5 years as fees)
Yr 1 invest 225 M
Yr 2 invest the other 225M
I have heard of SPACs returning back their money because of having poorly thought out the fee structure.
Takers?
I am concerned about reason-ability of management fees but more so if we can be allowed to deduct the whole 10% at outset i.e 50M and then draw 10M per annum?

We take an equity stake on the target companies. And hence as they sell we get some topline. The SPAC is a mining one. The model is similar to the Anglo model.