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FRM Part II · FRM Exam Part II · Private Markets Investing

A private equity fund has 200 million of committed capital and charges a 2% annual management fee on committed capital during the 5-year investment period. Fees are paid by drawing down from limited partners (LPs). Over the investment period, how much in total management fees will the LPs pay?

Total fees are 20 million. A 2% fee on 200 million of committed capital is 4 million per year, and over a 5-year investment period this adds up to 20 million, regardless of how much capital has actually been invested.

  1. A10 million
  2. B20 millionCorrect
  3. C4 million
  4. D40 million

Explanation

Fee = 2% x 200 million = 4 million per year. Over 5 years the total is 4 x 5 = 20 million. The 10 million option wrongly assumes only half the commitment is the fee base or only 2.5 years; the 4 million figure is just one year.

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