Question

Assume you want to invest $250m in a fund and want to structure your profit sharing with 15% carry and commitment capital as the basis of carry. You want to give 2.3% management fee. What would be your value multiple and profit if fund achieves the same GVM of 5?

Answer 1

To calculate the fund's value multiple and profit, determine the total value and deduct fees and initial investment. The profit share is calculated as a percentage of the profits remaining after fees and initial capital return.

Step-by-step explanation:

To calculate the value multiple and profit of an investment fund with a $250 million commitment, a 15% carry (profit share), and a 2.3% management fee, you must first determine the total value the fund would achieve. If the fund achieves a Gross Value Multiple (GVM) of 5, the total value would be $250 million multiplied by 5, equating to $1.25 billion.

The management fee annually would thus be $5.75 million (2.3% of $250 million). To find the profits attributable to the investors, the carry structure must be applied after the return of the initial capital and deduction of the management fees over the fund's life.

The formula to calculate the profit for the carry would be (Total Value - Initial Investment - Total Management Fees) * Carry Percentage. Assuming the fund's life is 10 years, the total management fees would be $57.5 million.

The profit before the carry can be calculated as follows: $1.25 billion - $250 million - $57.5 million = $942.5 million. Therefore, the carried interest (profit share) the fund manager would receive is 15% of $942.5 million, which is about $141.375 million.