Fee fandango

Managing a $10 billion fund has its benefits. For example, the management fees and transaction fees alone can generate more than $1 billion over 10 years. Add carry to the mix, and the whole mega-mega fund endeavor becomes nice work, if you can get it. The friction associated with fees has led limited partners to welcome co-investment vehicles, which have the effect of allowing LPs to invest directly in deals without paying the same level in management fees and carry.

Below is an example of a hypothetical $10 billion fund and the fees that it would generate over a 10-year period, given a set of assumptions. To simplify the example, the hypothetical fund invests in one deal each year for five years; each deal involves $2 billion in equity. Each deal returns a 15% IRR after a five-year holding period, and is therefore exited at a 2x gross return. The other assumptions are based in part on the terms of an actual US-based mega-fund raised recently, on the reported transaction fees from a recent US buyout mega-deal, and on interviews with advisors to institutional investors.

Year 1 Year 2 Year 3 Year 4 Year 5 $125? $125 $125 $125 $125 Year 6&#42 Year 7 Year 8 Year 9 Year 10 Total $67.5 $52.5 $37.5 $22.5 $7.5 $813 Year 1 Year 2 Year 3 Year 4 Year 5 $21 $21 $21 $21 $21 Year 6 Year 7 Year 8 Year 9 Year 10 Total $42 $42 $42 $42 $42 $315 Year 1 Year 2 Year 3 Year 4 Year 5 $0 $0 $0 $0 $0 Year 6 Year 7 Year 8 Year 9 Year 10 Total $400 $400 $400 $400 $400 $2,000