Introduction To Venture Capital & Private Equity#3: Fee Structure In Funds and Carried Interest
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- čas přidán 9. 07. 2024
- Introduction To Venture Capital & Private Equity#3: Fee Structure In Funds and Carried Interest
Explore the fee structure of PE & VC Funds - the '2+20' model:
- Management fee, paid annually
- Carried interest (or carry) - the share of profits paid to the PE partners; usually 20%
A worked example is included at the end.
Part #1 of this lecture series gave an overview over the PE & VC ecosystem and included data on:
- assets under management (AUM)
- Dry powder
- Buyouts vs Growthcapital vs Venture Capital
- Differences globally: US vs Europe vs Asia & Latam
Part #2 explained the lifecylce of PE & VC funds and details of fund formation, i.e. we explain how those investment vehicles are raised, who the players are in the private equity space, how they execute deals .
- Lifecycle of funds
- Deal Sourcing
- Family of Funds
- J curve
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Wow. Love this lecture. Thank you so much.
Glad you enjoyed it!
Great delivery, thanks!
Glad you like it!
Awesome presentation: I love your ability to clearly communicates data pertinent to PE & VC. Keep up the excellent work.
Glad you enjoy it! - plse share with entrepreneurs & invesors.
Really appreciate this. Could you continue to make more videos for us to know more about PE and deal structures.
Sure thing! - more in the pipeline...
Thank you for the video. Very useful.
Glad it was helpful! - stay in touch
Bella e brava complimenti.
An excellent exposition of all the concepts.
Glad you liked it!
This was insightful, thanks. Would have been amazing if an example of the American-style carry was also there. Also a bit more on scenarios where European is preferred over American model
ok
Private equity simplified, thank you Prof!
You're welcome
Professor, you are so precise and could communicate in a graspable manner. Just watched your video today (June 22). Can I ask for your email?
Excellent presentation, helped me a lot
glad it worked out
Awesome Claudia!
thx
That was very helpful thanks
Glad it helped
Excellent lecture, thank you Prof. Claudia
You are welcome!
Nice summary. Thanks for creating this! I’d love to hear some more of your perspective sharing on how you think the future incentive model will look like?
Thanks for the idea! It's on my list... Good question and the industry is not always open to innovation; but LPs are pushing for new models.
Thank you.
You're welcome!
Very understanding lecture. Thank you for this video.
Glad it was helpful!
@@claudiazeisberger Hi Mam,
One question I would like to ask, management fee is charged on comitted fund. But in comitted fund GP also invested his money, in this situation what will be calculation of management fee to calculated on whole amount of fund or after less GP share amount will be calculated. Could you please confirm that. Thank you.
Thanks
Welcome
Thank you so much for explaining clearly
Glad it was helpful!
@@claudiazeisbergerthank you for your reply. how can I contact you?
Amazing please do other videos on introduction of PE
sure -
@@claudiazeisberger you are the best
Thanks a lot for the explanation.
One question around minute 13:30 onwards (step 5 of the carry waterfall):
You mentioned that a hurdle rate (8% p.a.) would need to be satisfied prior to the GPs receiving their 20% split (catch-up). I assume this was left out of the worked example? In reality the payout of the hurdle rate would reduce the GP return below the 4$.
I had the same question. I may have misunderstood, but it seems like two steps were missed in the worked example: 1) the hurdle rate like you mentioned
2) the catch up phase where the GP receives 20% the amount distributed thus far to the LPs
then only would the remaining profit be split 80-20 between the LPs and GP.
It is a question of how and when the cash flows: IN our example we easily make the 8% hurdle. The waterfal gives you the questions which need to be answered before you move on to the next step, i.e. before the next 'cash' will flow. (pardon late reply - somehow this one slipped through.)
Sorry I still don't get it. Why don't you perform steps 2 and 3 of the waterfall?
Great explanation though!
Thank you so much. This was very informative, concise, and well-presented. Do you think that you can make a video on how private equity and venture capital funds are taxed? I would love to hear your perspective.
Yes, soon
@@claudiazeisberger Thank you. I look forward to it.
Hi is the GP catch-up equal to 20% of the capital distributed to the LPs in step 1 (committed capital) and step 2 (hurdle), or just step 2 (hurdle). Thank you!
it is equal to all paid to the LPs; so after the catch up, all remaining profits can be shared 80% to LPs and 20% to GPs. Once all has been distributed, the math has to work out on a fund-level, as agreed during fundraising: out of net-profits ==>Gp (20%) and LPs (80%).
Thank you professor.
In these examples you talked about exits as sales. Do funds ever grow these companies and keep them for cash flow? Who makes that call?
Not for VC funds. That are always aiming at exits. Fund close after 10 years. They are not about holding a bunch of companies for cash flow. It isn't the business model.
thats the point - Some funds do ask their LPs for the right to hold on to such investments. Follow-on funds are often the ones who may then step in. But as you said 'It's not he Biz model of what we call closed- end funds in VC land
Great presentation, prof! I have two questions, 1. How does the mechanism to distribute 20% carry GP if The GP is a company with consist of Director, Investment team, legal and others? How much do they get the portion? 2. if using the American style, How does the mechanism if the Director or other team member leaves the company before the end of fund live? Does he/she keep get the portion of carried interest if GP gets carried bonus after he/she leaves the company (they are involved in investing period)? Thank you.
Ad 1: usually the senior partners share the majority of the carry; then the rest is distributed to junior partners, principals etc ... It is different from one PE firm to the other. Also, it may eb different from fund to fund within the same PE firm. (NOte: the seniors are partners - as the PE fund has a finite life and is dissolved once all investments have been exited and money has been returned to LPs and carry has been shared.
Ad 2: leaving the firm before carry is paid usually means that the carry is left behind, i.e goes back into the pool and is distributed to the remaining partners. It will depend on the contract of the partner & his/ her seniority. There may be eception, but the standard rule is that any carry claims are left behind.
Hi, regarding the catch up fees is it a 20% of the total distributed dollars in step 1 & step 2 (capital invested & hurdle) ? Or 20% of the hurdle distributed only?
after catchup everyone is on the same base in terms of distribution.
@@claudiazeisberger many thanks, actually my question is regarding the catch up fees it self and it is calculation. Is it from the dollar disturbed to LPs or only as % from the preferred distribution. Thanks :)
How do VCs and PE set targets for management of companies?
Before they invest - looking at the busines and developing in PE the 'first -100-day plan' to effect changes. IN VC its different - companies are building a product first, deciding if the market acceots it, so develop market tests etc ... then set KPIs or milestones and look to raise the next round. Hope this helps.
@@claudiazeisberger AMAZING it's like magic went in between my 👂 ears. Professor Claudia what is KPI?
Many thanks. Can I ask for your email Professor?
Hi, - may i ask for the purpose?