Question

You are planning to start a $30 million VC fund. You have two other partners (three GPs in total), and plan to impose a 2 percent management fee and 25 percent carried interest. The fund will have an 8 year life, with the first four years being for finding and making investments ($7.5 million per year) and the second four years for managing and harvesting. On average, your investments will and return 30 percent annually and run for four years, i.e., investments made in Year 1 will be harvested in Year 5. a. What is the annual management fee per GP? b. How much carried interest will each GP receive in each of the years 5-8? c. What is the LPs IRR, assuming their full $30 million is put up at Time 0? show steps pls.

Answer 1

Part(a): Management fee is the annual fee charged on the total committed capital of the fund to meet operational expenses of running the fund. The total committed capital is $ 30 Million. Thus a 2% management fees is $ 600,000. Since there are 3 General Partners, each gets a 3rd share which is equal to $ 200,000.

Part(b): Carried Interest is calculated on any distribution by the fund to LPs after the LPs get back their entire investment. Since each investment is returning 30% annualized return after 4 years. The redemptions from year 5 to 8 is (7.5*(1+30%)^4) = $ 21,420,750 each year. The inital investment is $ 30 million. So in Year 5, the GPs do not get any carried interest as full capital is not returned to the LPs. In Year 6, Profit = 21,420,750 - (30,000,000 - 21,420,750) = $ 12,841,500. Carried Interest = 25% of 12,841,500 = $ 3,210,375. Each GP gets a 3rd share = $ 1,070,125.

From Year 7 to 8, since all capital has been returned, entire return in eligible for carried interest. Carried Interest = 25% of $ 21,420,750 = $ 5,355,187.5 Each GP gets a 3rd share = $ 1,785,062

Part(c):

	0	1	2	3	4	5	6	7	8
Investment	-       30,000,000	-	-	-	-	-	-	-	-
Returns	-	-	-	-	-	21,420,750	21,420,750	21,420,750	21,420,750
Management Fees	-	- 600,000	- 600,000	- 600,000	- 600,000	-      600,000	-      600,000	-      600,000	-      600,000
Carried Interest	-	-	-	-	-	-	-   3,210,375	-   5,355,188	-   5,355,188
Net Cashflow for LPs	-      30,000,000	- 600,000	- 600,000	- 600,000	- 600,000	20,820,750	17,610,375	15,465,563	15,465,563

The table above summarizes the cash flows to LPs for each year. The IRR comes out to be 13.21%