FRM Part I · FRM Exam Part I · Fund Management
A buyout fund has a 2% annual management fee on committed capital and 20% carried interest over an 8% hurdle with no catch-up. An LP committed USD 100 million. Over the life of the fund, after all fees, the fund's investments produce total distributions that exceed contributed capital plus the hurdle. Which statement about the 2% management fee is correct?
The management fee is 2% of committed capital, which is USD 2 million per year on a USD 100 million commitment. It is charged regardless of how much capital has been drawn down and regardless of performance, unlike carried interest, which depends on the hurdle.
- AIt is USD 2 million per year charged on committed capital, regardless of how much has been drawn downCorrect
- BIt is charged only on the capital actually invested in the first year
- CIt is USD 2 million per year only if the hurdle is exceeded
- DIt is USD 20 million per year because it is paid with carry
Explanation
Management fees in PE funds are typically based on committed capital, so 2% of USD 100 million equals USD 2 million per year whether or not capital has been drawn. It is paid regardless of performance, unlike carry, which depends on the hurdle.
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