CFA Level IAlternative InvestmentsMedium
A private equity fund has a committed capital of $500 million. The fund charges a 2% management fee on committed capital during the investment period, and on net asset value (NAV) during the post-investment period. If the investment period lasts 5 years, and the average NAV during the post-investment period (years 6-10) is $600 million, what is the total management fee collected by the fund over its 10-year life?
- A$50 million
- B$80 million
- C$60 million
- D$70 million
Show answer & explanationAnswer & explanation
Correct answer: D. $70 million
During the investment period (5 years), the fee is 2% of $500 million committed capital per year. During the post-investment period (5 years), the fee is 2% of the $600 million average NAV per year. Summing these annual fees over the respective periods yields the total management fee.
Why the other options are wrong
- A. This only accounts for the management fees during the investment period.
- B. This overestimates the management fees, likely by misapplying the fee basis or period.
- C. This incorrectly calculates the management fee based on NAV for the entire fund life or makes calculation errors.
Private Equity Management Fees
Private equity funds charge management fees, typically 1.5% to 2.5% annually, to cover operational expenses.
- Calculated on committed capital during the investment period.
- Calculated on net asset value (NAV) during the post-investment period.
- Reduces the limited partners' (LPs) net returns.
Memory trick: Committed Capital for Investment, NAV for Post-Investment, then Sum.