Suppose that the following four funds—all with committed capital of $100M—have combined to form a syndicate to invest in Newco:
(I) ABC Fund, management fees of 2.5 percent per year of committed capital for all
(II) DEF Fund, management fees of 2.5 percent per year for the first 5 years, then decreasing by 25 basis points per year in each year from 6 to 10. All fees calculated based on committed capital.
(III) UVW fund, management fees of 2.0 percent per year. During the first 5 years of the fund, these fees are charged based on committed capital. Beginning in year 6, the fees are charged based on net invested capital. UVW expects to be fully invested by the beginning of year 6, and also to have realized 25 percent of all investment capital by this time. In each of the subsequent 5 years, UVW expects to realize about 15 percent of all investment capital.
(IV) XYZ fund, management fees of 2.0 percent per year of committed capital for all 10 years. The XYZ fund expects to make all exits very quickly and to reinvest capital back into new investments. The total amount of investments is limited to $100M.
(a) Suppose that each fund in the syndicate invests $5M in Newco. What is the LP cost for each fund?
(b) It is possible that all four funds could agree on all the assumptions to the VC method, but still disagree about the wisdom of making this investment. Explain the economic logic behind this possibility.