PRIVATE EQUITY FEES TO LIMITED PARTNERS

2014-10-11

A Private Equity fund will typically charge both a management fee and a performance fee to its limited partners. While this varies by firm and its funds, typical management fees consist of 2% of assets under management and performance fees of 20% which are taken from exited investments. Performance fees are also called “carried interest” or “carry.” Sometimes, there is a hurdle rate which is a percentage return (typically 8-10%) that limited partners must achieve before performance fees can be received by the private equity fund. Performance fees motivate the partners of private equity firms to generate superior realized returns. These fees are intended to align the interests of the general partner and its limited partners.

The investment team of the Private Equity fund will typically receive a percentage of the overall performance fee as part of their compensation package. For example, a pre-MBA associate may receive 0.3% of the performance fee and a Managing Partner may receive more than 50% of the fee. However, from start to finish, the investment team will need to wait until all investments made are exited and realized in the fund before receiving any carry.