FRM Part I · FRM Exam Part I · Fund Management
A private equity fund has committed capital of $200 million and charges a 2% annual management fee on committed capital during the investment period. What is the management fee for one year during this period?
The fee is $4 million, because a 2% management fee applied to committed capital of $200 million gives 0.02 x 200 = $4 million. The base during the investment period is committed capital, regardless of how much has actually been drawn down.
- A$2 million
- B$4 millionCorrect
- C$8 million
- D$40 million
Explanation
The fee is 2% x $200 million = $4 million, because the base is committed capital, not invested or net asset value. $2 million would result from using a 1% rate, and $8 million from an 4% rate. $40 million results from using 20% (the carry rate).
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