Question

AUAF venture fund has raised $300m to invest in education sector in Afghanistan. The fund charges a management fee of 2.5% of the committed capital for the first 4 years, then it decreases by 30 basis points for subsequent six years. Carried interest is 25% based on investment capital. The fund makes a cumulative distribution of $700m over its lifetime. Calculate the following:

a) lifetime fee :
b) investment capital
c) carried interest for GPs
d) assume if the same fund wants to charge a carried interest of 30% based on committed capital. What will be carried interest for GPs?
e) Now, assume the fund charges 20% carry based on contributed capital with 10% hurdle rate.
What will be the total value of the carry if there is 100% catch up and if there is no catch up?

Answer 1

The AUAF venture fund charges a management fee of 2.5% for the first 4 years and then reduces it by 30 basis points for the next 6 years. The lifetime fee is $102 million, the investment capital is $198 million, and the carried interest for GPs is $49.5 million. If a carried interest of 30% based on committed capital is charged, the carried interest for GPs would be $90 million. Depending on whether there is a catch up or not, the total value of the carry would be $50 million or $60 million.

Step-by-step explanation:

a) Lifetime fee:

The lifetime fee can be calculated by multiplying the management fee rate by the committed capital for the first 4 years and the reduced rate for the subsequent 6 years. For the first 4 years, the fee is 2.5% of $300 million which is $7.5 million per year. For the next 6 years, the fee decreases by 30 basis points (0.3%) each year. Therefore, the total lifetime fee is $7.5 million per year for 4 years plus $7.5 million minus 0.3% of $300 million per year for the next 6 years.

b) Investment capital:

The investment capital can be calculated by subtracting the lifetime fee from the committed capital. The committed capital is $300 million and the lifetime fee is $102 million (calculated in part a). Therefore, the investment capital is $300 million minus $102 million, which equals $198 million.

c) Carried interest for GPs:

The carried interest is 25% of the investment capital. The investment capital is $198 million (calculated in part b), so the carried interest for GPs is 25% of $198 million, which is $49.5 million.

d) Carried interest for GPs with 30% based on committed capital:

If the carried interest is 30% based on committed capital, we can calculate it by multiplying 30% by the committed capital. The committed capital is $300 million, so the carried interest for GPs would be 30% of $300 million, which is $90 million.

e) Total value of the carry:

To calculate the total value of the carry, we need to consider if there is catch up or not. If there is a 100% catch up, the total value of the carry is equal to 20% of the contributed capital minus the hurdle rate of 10%. If there is no catch up, the total value of the carry is simply 20% of the contributed capital.

Total value of the carry with 100% catch up:

If the contributed capital is $300 million, the total value of the carry with 100% catch up would be 20% of $300 million minus 10% hurdle rate, which is $50 million.

Total value of the carry without catch up:

If the contributed capital is $300 million, the total value of the carry without catch up would be 20% of $300 million, which is $60 million.