What are the implications of the shift from a 20% carried interest and 2% annual management fee to a 25% carried interest and a 2% annual fee? What are the net IRR and net MOIC to the limited partners under each of the two fee structures as a function of Excellere's gross returns? What is the dollar value of Excellere's compensation under the two fee structures? How much better does Excellere have to be (in terms of IRR) from the typical PE fund in order to justify the greater carry? (Lily planning on doing this)

First use the following assumptions:

The fund has a ten-year life, with committed capital (the total amount of fundsincluding fees that the investors have promised to provide) of $500 million.

The funds are invested in 4 equal installments in each of the first 4 years.

The management fee is 2% of committed capital for the first five years, payable in advance at the beginning of the year. After five years, the fee equals 2% of capital employed / invested capital. I.e., as investments are sold, Excellere does not earn a management fee on the sold investments.

Each of the annual investments is held for 5 years and then sold / distributed. Assume that the investments earn the same annual gross rate of return. In the base case, assume that the investments earn a 25% gross return over 5 years. Then, show how the analysis changes using different annual gross rates of return - e.g., 5%, 15%, 35% and 45%, -- and different holding periods - 3 and 7 years.

Assume Excellere does not receive its carry until the investors have received distributions equal to their invested capital. What happens if Excellere receives its carry as long as its invested assets are valued above cost (i.e., have not lost money)?

Answer rating: 100% (QA)

The implications of the shift from a 20 carried interest and 2 annual management fee to a 25 carried interest and a 2 annual fee are as follows Carrie... View the full answer