4.A PE firm with a $10 billion fund charges a 2 percent management fee annually, and 20 percent carried interest on profits. In year 5, the company is acquired at 2x its investments. What is the investment multiple and IRR for the LPs?
Management fee are the price charged by the fund manager and is calculated as the % of the total asset
- Per year Management fee = 2% * 10 billion= 0.2 billion
Therefore, management fee for 5 years will be 0.2*5 = 1 billion
Carried Interest is the % share of profits that the fund manager will receive.
Company is acquired at 2x i.e 20 billion and therefore profit of $10 billion. Carried interest will be 20% *10 billion
Carried interest = 2 billion
investment multiple = Final Return/Amount Invested = (Acquired amount - carried interest - management fee)/Initial investment
= (20 - 2 - 1)/10 = 1.7 times
The IRR will be given as - [(1 + IRR)^5= Investment Multiple
= [(1 + IRR)^5= 1.7
= IRR = 1.1119 - 1 = 11.20%
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