Ridici-dollars. This is the reason someone becomes a hedge fund manager. You may not be particularly money-hungry at this point in your young life, but once you’ve bought your sixth car, fourth home and third professional sports team, you will understand the appeal.
A venture or hedge fund will typically charge 2% management fee and up to 30% of the profits (for most hedge funds, it’s 20% of profits), often depending on performance quality and a minimum Return On Investment (ROI) ratio. Quick math: There are 4 General Partners in the venture capital partnership that funded The Sauce Company. That fund, PurpleKey, raised $300 million from various investors, with which they funded a lot of companies not dissimilar to The Sauce Company. Despite their being savvy investors and conducting massive amounts of due diligence, there is still a very high failure rate for these investments; you kiss a lot of frogs in the hope that you might get one prince.
It’s really sad that our world leaders don’t wear tights anymore.
After 7 years hard toil, they had a bunch of bankrupt clunkers but also some home runs. Six of their investments resulted in the Holy Grail – an IPO – and they distributed a total of $1 billion to their Limited Partners. The “Carry” is the difference between the distribution and the original investment, or $700 million.
But wait! Are we to assume that PurpleKey worked 7 years for FREE? Pshaw! Not even close. During that time they charged 2% fees on the entire $300 million – or $6 million a year times 7 years, or $42 million. (We are oversimplifying here for our fine illustrative porpoises.) Fees are subtracted from Carry. So the fund shows a profit of $1 billion minus $300 million minus $42 million, for an overall profit of $658 million.
The ROI is $658,000,000/$300,000,000≈2.17. (Not annualized, obviously). We’ll assume that the ROI magic number was 2, so they hit the ROI minimums for the investors. Result: The General Partners of the firm keep 30% of the $658 million and split $197.4 million 4 ways, or a tad under $50 million per partner. Not a bad gig if you can get it.