Generally, a private equity fund will incur the following expenses:
Organizational Expenses—relate to establishing and organizing the
fund and its infrastructure.
Operational Expenses—relate to the operation of the fund. Include: expenses relating to the management company’s management of the fund; acquisition, holding, and disposition of investments expenses; and fees and expenses of service providers (i.e., fees of attorneys,consultants, custodians, administrators, and accountants).
Extraordinary Expenses—include litigation and indemnification costs
and expenses.
Tax-related Expenses
Expenses generally
Organizational Expenses
Covers forming the fund, general partner, management company, fund-related vehicles. Printing, travel, accounting, legal, other expenses. Fund’s operating agreement covers organizational expenses, but typically a cap will be set forth in the operating agreement regarding these expenses.Paid with investor capital commitments. Organizational expenses of private equity funds have risen significantly in recent years due to increasingly complex fund structures and increases in the costs of preparing marketing documents. The formation of the general partner, the investment manager, and other control entities has also become more complex and therefore, more costly.
Operational Expenses
Management company’s management of the fund;
• Acquisition and disposition expenses;
• Holding expenses; and
• Fees and expenses of service providers.
Operational Expenses
- Management Fee Expenses-
A fund’s management company generally receives a management fee for themanagement services and investment advice which it provides to the fund andthe fund’s general partner.• The market rate for management fees of private equity funds is approximately1.5%–2% of the fund’s aggregate capital commitments during the fund’sinvestment period (i.e., the first three to five years of a fund during which it isallowed to invest in new portfolio companies). Often, after the end of thefund’s investment period, the management fee is reduced.• Management fees are typically funded out of investors’ capital commitmentsor the fund’s operating cash flows.• However, management fees may be charged to investors directly in additionto their capital commitments.– Acquisition and Disposition FeeExpenses
Operational Expenses
– Acquisition and Disposition Fee Expenses -
Acquisition and disposition fees may be charged by fund managers to funds or to portfolio companies for structuring and negotiating documentation of investments.
• If the fee is payable by the portfolio company, it may be subject to management fee offsets.
Broken Deal Expenses
• Break-up fees are paid by a target company of a buyout fund when the target company wishes to terminate the purchase agreement between itself and the fund in order to accept a higher purchase price from another party.
Finder’s Fee Expenses
• Finder’s fees are typically paid in cash but may be paid in the form of equity in
the target investment.
Operational Expenses
– Holding costs -
Holding costs refer to costs associated with third-party service providers and contractually required expenses relating to an investment during its holding period.
Travel Expenses
• Some operating agreements provide for investment-related travel expenses to be borne by the fund, but this varies.
• Some funds only cover travel expenses that are incurred as part of the acquisition or disposition of an investment.
Service Provider Expenses
• Legal costs represent a large portion of service provider costs prior to the launching of the fund.
• Costs of auditors also have risen significantly.
• More private equity funds also are retaining the services of custodians and administrators.
Extraordinary Expenses
Extraordinary expenses incurred by a fund (for example, indemnity obligations and litigation costs) can substantially impair its performance.
• As a result, the extent to which a fund may be obligated to indemnify its managers has been curtailed significantly over recent years.
Partner Meeting Expenses
• A fund can incur substantial costs for its annual partner meetings.
• These meetings are considered an important part of fund communications.
Tax Expenses
Extraordinary expenses incurred by a fund (for example, indemnity obligations and litigation costs) can substantially impair its performance.
• As a result, the extent to which a fund may be obligated to indemnify its managers has been curtailed significantly over recent years.
Partner Meeting Expenses
• A fund can incur substantial costs for its annual partner meetings.
• These meetings are considered an important part of fund communications.
Consult Us
I'm a paragraph. Click here to add your own text and edit me. It’s easy. Just click “Edit Text” or double click me to add your own content and make changes to the font.