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%

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