fees and Returns for Three Private Equity Funds ($ millions)
Fund A | Fund B | Fund C | |
Management Fee | 2% | 2% | 2% |
Carried Interest | 17% | 18% | 20% |
Hurdle Rate | 7% | 8% | 10% |
Paid in Capital | 100.0 | 100.0 | 100.0 |
Gross Return Year 1 | 6% | 8% | 10% |
Gross Return Year 2 | 12% | 10% | 8% |
Clark continues the discussion by stating that private equity returns are typically analyzed and measured on the basis of return multiples. The return multiples most frequently used by limited partner investors are paid in capital (PIC); distributed to paid-in (DPI); residual value to paid-in (RVPI); and total value to paid-in (TVPI). Clark then produces another table (Exhibit 2), which illustrates cash flow and distribution data for Funds D and E and that is used to calculate the return multiples.
Based on Clark’s explanation of private equity fund structures and Exhibit 1, the fund which produced the highest net return over two years to its limited partners is most likely:
- Fund A.
- Fund B.
- Fund C. Plz explain how to solve this
Answer is Option C.
Fund A
1st year : 100*.06 = 6M (Gross return)
2nd year : 100*.12 = 12M (Gross Return)
Net return for 2nd year = 12-2.04-2 = 7.96
Total net return for 2 years for fund A = 11.96
Using the same method Fund B’s net return for 2 years is 12.2M and Fund C has a net return of 14M. Hence answer Option C.