*** Interview Prep *** Demystifying Fees 👉 Management Fee - Mutual Funds and Hedge Funds: Management fees typically range from 0.5% to 2% of AUM, also referred to as Gross NAV. The fee remains flat throughout the tenure of the fund and reflects the costs of active portfolio management and operational expenses. Private Equity and Private Credit Funds: - Management fees are based on Committed Capital during the investment phase, unlike Mutual Funds and Hedge Funds that charge fees on AUM. - Fee Structure Over Time: During the investment phase (first 4-5 years), fees are typically 1.5% to 2% of committed capital. After the investment phase, fees reduce to 1% to 1.5% of invested capital, reflecting the shift in workload to monitoring investments and planning exits. Why the Difference? Mutual Funds and Hedge Funds are liquid investments with immediate market exposure, while Private Equity and Private Credit involve illiquid assets, requiring significant upfront due diligence and capital deployment over time. 👉 Performance Fee Mutual Funds: Performance fees are generally not charged, as these funds cater to retail investors and rely on management fees alone. Hedge Funds: Hedge funds often charge 20% performance fees on profits exceeding a hurdle rate (minimum target return). The hurdle rate is typically tied to a benchmark such as LIBOR, SOFR, or a specific return threshold. Private Equity and Private Credit Funds: While there is no "performance fee" in the traditional sense, similar concepts like GP Catch-Up and Carried Interest reward fund managers based on fund performance. 👉 Catch-Up and Carried Interest Catch-Up and Carried Interest are mechanisms to reward General Partners (GPs) after meeting predefined thresholds, following the Waterfall Distribution model: Return of Capital: LPs receive the full return of their invested capital first. Hurdle Rate (Preferred Return): LPs receive a minimum return (e.g., 8%) on their capital before the GP is entitled to profits. GP Catch-Up: Once the hurdle rate is met, the GP may receive 100% of profits until their share reaches 20% of total profits (preferred return + GP catch-up). Profit Split: After the catch-up, remaining profits are distributed in an 80/20 ratio (80% to LPs, 20% to GPs). 👉 Why is Carried Interest Not a Fee? Not Guaranteed: Carried interest is contingent on the fund’s performance and is earned only if returns exceed the hurdle rate. Tax Advantage: Unlike fees (ordinary income), carried interest is often taxed as long-term capital gains, provided conditions such as holding periods (e.g., three years under U.S. law) are met. 👉 Global Tax Treatment: U.S.: Carried interest is treated as capital gains under the 2017 Tax Cuts and Jobs Act, requiring a minimum three-year holding period to qualify. EU: Tax treatment varies, often a mix of capital gains and earned income. India and China: Carried interest is typically treated as ordinary income, taxed at higher rates.
Very helpful
Very helpful
Very informative
Very helpful
Fund Accounting Implementation Specialist, specializing in Private Equity | Ex-PwC
3wThanks Ajit Nair for sharing. Very helpful.