General Partner (GP): private equity firm
- E.g., Carlyle Group, TPG, KKR, Blackstone, and Apollo
- Make money primarily through management fees and performance fees
Management fees – typically 2% of assets
- Cover office rent, employee salaries and other types of day-to-day expenses
- Sometime lower for mega funds, higher for smaller funds
Performance fee (carried interest/ the carry) – typically 20% of the upside
- Compensate the GP for its performance
Hurdle rate – an option
- Guarantee the investor receives a fixed amount
- GP cannot receive any fee before the hurdle
An example – distributing the performance of a private equity fund
A fund with a performance of 20%, a hurdle rate of 8% and a GP catch up clause
- 8% hurdle performance go to the LP
- 2% management fees go to the GP
- 8% go to LP (Remaining 10% performance * 80%)
- 2% go to GP (Remaining 10% performance * 20%)
- Both LP and GP receive 10%