Fee Structure

  

Categories: Banking, Managed Funds

See: Carry.

Note that the fee structure of any given investment fund just refers to how overpaid the General Partners of that fund will be. So in a "two and twenty" fee structure, the GPs are overpaid 2% per year as a management fee, whether they do well or not. And then they are paid 20% of the profits of the fund.

Other fee structures are way different. For an index fund, for example, it's a flattish fee of, say, 0.4% per year to manage a given sector fund. That's it. No notional profit participation or carry. No extra fees. Just a burger, fries, and a shake for $6.95, tyvm.

Related or Semi-related Video

Finance: What is carry?2 Views

00:00

And finance Allah shmoop What is Carrie shmoop Ah the

00:07

Holy Grail The warmth of the wealth The golden ring

00:10

worth fighting for That's what it is Partners in an

00:13

investment firm who get quote kari unquote for their investing

00:18

efforts essentially carry out of the office loads and loads

00:21

and loads of dough Well how does this magic happen

00:24

Well here's the math explanation You're one of three partners

00:28

at Joe Bob and Sill Ease Venture Capital Shop You

00:31

have five hundred million bucks under management under a two

00:34

and twenty five structure That is you get two per

00:36

cent of that money per year as fees just kind

00:39

of managed company And then you also get twenty five

00:42

percent of profits from that fund Those profits are your

00:46

carry questions How do you calculate them Yourjob to invest

00:50

that five hundred million dollars and make money for your

00:52

shareholders Your limited partners as they're called and you three

00:55

here are the general partners so you go along investing

00:59

and you take ten mil a year in fees and

01:01

that two percent of the five hundred mill and those

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fees cover the salaries and small bonuses to the dozen

01:06

or so junior partners you have all Stanford MBA is

01:09

running around like chickens with their heads cut off squawking

01:12

for hot deals and cold calling CEOs of private companies

01:15

They bring you those deals and you say yea or

01:18

nay The two percent of your fee also covers you

01:21

know secretaries and rent and insurance and travel and conference

01:24

going in lawyers in an end So five years go

01:27

by and you've taken out ten mil a year in

01:29

fees each year for a total of fifty million dollars

01:32

As you've invested the remaining four hundred fifty million dollars

01:36

right you made eighty investments total Fifty of them went

01:38

totally bankrupt On twenty of them You got your money

01:41

back and on ten you made an average of while

01:43

twenty times your money or thereabouts Not all of the

01:46

investments were the same amounts but the result was that

01:49

on your four hundred fifty million dollars of actual infesting

01:52

you turned that money into two billion dollars When those

01:56

hot cos you funded early in their existence went public

01:59

in a night Pio and then six months and a

02:01

week later you distributed the shares you had in them

02:04

so the profit calculation is based on the original five

02:07

hundred million You Ray's not the fifty million of expenses

02:10

you had while administering the fund So on exactly two

02:13

billion dollars of realized profits you had one point five

02:17

billion dollars of profits Meaning you sit behind that fifty

02:20

million and expenses that's on you baby And no in

02:23

the venture capital world ofthe most nobody cares whether it

02:25

took you three years or six years or twenty years

02:28

to make those profits There is oddly little attention paid

02:31

to the time value of money in that world at

02:34

least in Silicon Valley So on that one point five

02:36

billion dollars your Carrie was twenty five percent or three

02:40

hundred seventy five million dollars You split it three ways

02:44

with your partners and each of you takes out a

02:46

cool hundred twenty five mil Even cooler you have likely

02:49

raised a new fund every two or three years So

02:51

you get these waves of dough coming in every few

02:54

years at least regularly And then after enough years of

02:57

doing this business while you get to buy one of

02:59

these yeah that's Carrie

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