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

A private equity fund has committed capital of $200 million and charges a management fee of 2% per year on committed capital during a five-year investment period. Which statement correctly describes the annual management fee during this period?

The annual fee is $4 million, which is 2% of the $200 million committed capital. When fees are based on commitments, they are charged regardless of how much capital has been drawn or invested, and they do not depend on the preferred return being met.

  1. A$4 million per year, regardless of how much capital has been drawn downCorrect
  2. B$4 million per year only on the portion of capital already invested
  3. C$2 million per year because fees are charged on half of commitments
  4. D$4 million per year, but only after the preferred return is achieved

Explanation

Fees on committed capital are 2% x $200 million = $4 million annually, independent of drawdowns or invested amounts during the investment period. The option based on invested capital describes a different fee base. Fees are not contingent on the hurdle; carried interest is.

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