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How is a Private Equity fund manager remunerated?
There are several types of fees in a Private Equity Fund. The 2 most common fees are the management fee and the carried interest.
What is the Management Fee for a Venture Capital/Private Equity Fund?
The management fee is a fixed fee paid annually by the investor to the fund managers to cover operating costs.
What is Carried Interest for a Venture Capital/Private Equity Fund?
The carried interest is a performance bonus attributed to the fund manager if the fund’s Net Performance (measured as IRR (Internal Rate of Return)) has reached a certain level of return; the so-called Hurdle Rate.
For example, a fund typically levies 20% carried interest with a 8% hurdle rate means that 20% of the profits above 8% are remuneration for the manager. If the fund’s Gross Performance is below the hurdle rate, no carried interest is charged. TheClubDeal Fund II levies 15% Carried Interest above a 6% Hurdle Rate, as presented by Harold in the video.
To ensure the Net Return is not lower than a Gross Return above the Hurdle Rate, the performance up to the Hurdle Rate is remunerated with a separate mechanism called the Catch-up Rate. It can be identical or different to the Carried Interest and is also only levied if the Gross Return is above the Hurdle Rate.
In the case of TheClubDeal fund II SA the Catch-up Rate is identical to the Carried Interest at 15%. This means that if the Gross Fund Performance is above the Hurdle Rate, for example 12%, 15% of the 12% Gross Performance will be attributed to the fund manager as a Performance-based Remuneration.
These performance fees are seen as a strong incentive for the fund manager to deliver performance, allowing for maximum alignment of interest between investors and the fund manager, who will do everything possible to achieve the best possible return.