Question

1. Suppose a private equity fund has $100 million in committed capital and its base rate for management fees is 2%. The fund invested in 10 companies during the first 5 years and begins to exit its investments in year 6 at the rate of two exits per year until the end of year 10, when all investments have been exited. Assume the original cost basis for each investment is $10 million. Also assume that fees calculated on net invested capital are based on year-end balances. How much in lifetime management fees does the firm earn, based on each of the following two methods?
(a) Constant fee % and total committed capital for the life of the fund.
(b) Constant fee % with basis changing to net invested capital after year 5.

Answer 1

What Is Committed Capital?

Committed capital is the money that an investor has agreed to contribute to an investment fund. The term is typically used in relation to alternative investments, such as venture capital (VC) and private equity (PE) funds.

Unlike publicly-traded instruments, such as exchange-traded funds (ETFs), VC funds and other alternative investments are relatively illiquid. As such, their managers rely on investors' committed capital to ensure they have adequate resources to fund their acquisition pipeline and administrative expenses.