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Explain the fee structure of a PE fund – What is the 2-20 fee structure?
Customarily, PE funds charge two types of fees:
a. Management fee, and b. Carried interest
a. Management fee: This is c.2% of the funds raised and is independent of the performance of the fund. Assuming City Investment Venture raised £1bn fund then the management fee works out to be £20m annually. This fee is used to paying the fees of the fund’s employees, office rent and other admin related expenses.
b. Carried interest: Private Equity funds also share 20% in the profits of the fund, once its returns exceed the hurdle rate. The hurdle rate typically around 8 to 10% is the minimum return that the fund should generate before the PE fund can share 20% of the investment’s upside.
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