You Can Buy Some Pretty Bright Lights With Those…
The structure of private equity funds (which venture capital is basically a subset) mandates that investors pay a 2% management fee and a 20% share of the profits. The 2% is largely marketed as allowing the firm to ‘keep the lights on’ and for basic overhead.
A study from Wharton though, says that about 61% of revenue for private equity firms comes from fixed sources like the management fees and the remaining in variable compensation like the performance fees.
The percentage is likely to go up as fund sizes explode (although some venture capital is gravitating to smaller funds) and the 2% has a larger denominator. And it is somewhat controversial since the management fee is considered ‘at-risk’ and so taxed as capital gains (15%) rather than corporate income tax (35%).
If the industry does endure a shake-out now the credit market is finally realizing that the debt to buy Burger King is probably a little riskier than the debt the United States treasury issues, let’s hope the fee structures can similarly undergo a shake-up, although that is a little wishful thinking.
