Demystifying Compensation of GP’s
There are three basic ways in which General Partners are compensated. These are:
1. The fund management fee:
Also called Management fee, this is an annual fee and isnormally a fixed percentage of the total capital committed during the investment period andsometimes a fixed percentage of unrecovered capital thereafter.
is the amount of money that the LP’s have paid cumulatively upto thatpoint. The industry standard is about 2% for Venture funds (smaller) and about 1% for larger PEfunds.
is the part of the fund that is not paid by the LP’s as yet. Not all money ispaid upfront by LP’s but is paid in installments.
Say for our WIMWI Fund the LP’s, led by ‘Nacho’ji, have committed to pay $ 1 Billion over 5equal installments in 5 years (4 – 5 installments is the norm) i.e. $ 200 million per installment.Let us also assume a 2% fund management fee to be paid to ‘Maacho’ji and group.Therefore, for the first year the Fund management fee amounts to $4 million (2% of $200million) for the second year it would be $ 8 million and $ 12 million for the third year and so ontill it reaches $ 20 million in year 5. (Remember fund management fee is a percentage of thecumulative capital paid by LP’s).Now after year 5, it stays constant at $ 20 million per year for the last 5 years.This fee is normally used to cover the fixed expenses of the fund, eg. salaries, office rent, etc.
Exceptions from the illustration:
This may be calculated annually / semi-annually or quarterly based on the pay-in structure of the fund.