| Private equity firms' fees
Private equity returns are shown net of all costs, fees and carried interest
The remuneration of the private equity fund managers (the "general partners" of a limited partnership fund) is governed by sophisticated contractual arrangements. In return for their investment services, general partners receive a management fee and a share of the profits of the fund - known as the "carry" or "carried interest".
Fees on committed capital
Many private equity firms charge a management fee of between 1.5% and 2.5% of committed capital, usually paid up to the sixth year. These fees are gradually phased out to take account of realised investments.
Carried interest and hurdle rate
Profits of a limited partnership fund are usually shared on an 80/20 basis with 80% going to the limited partners and 20% to the general partners. In addition, many partnership contracts include a so-called "hurdle rate", which gives limited partners a preferential access to the profits of the partnership if the total returns are insufficient - thus eliminating part of the downside risk for institutional investors.
London Business School's point of view
"From an investor's point of view, the decision whether or not to invest in this asset class should not depend on the level of rewards for the venture capitalists, but on careful analysis of whether the expected net returns justify the level of risk and the necessary investment in management-picking skills."
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