IGS a mid sized private equity makes a $20M investment in Sverig and $100M LBO in L’Offre, committing to an additional $100M for possible future capital drawdowns. In the context of carried interest under the total return using invested capital method what is the invested capital? I included the additional $100M, which is incorrect. Can someone please explain why?
Hi there. Isnt the additional $100m considered committed capital instead? It isnt really invested yet since it is undrawn. Just done with this super long reading, hope i got it right…
Committed capital just means that investors have committed to providing at it some point in the future, it has not yet been called. So, not only is that $100 MM not invested, the PE Fund doesn’t even have it.
there are two 100M amounts. the first is the 100M investment in the LBO, and the second is the 100M commited to the LBO. so when they say the total investment is 120, its 20 from the VC and 100 investment to the LBO. then u see if your total return of 180 is greater than 30% more than the invested capital increased by 30%. it is so the carried interest is 20% x total return of 120.
MissStupid Wrote: ------------------------------------------------------- Hi there. Isnt the additional $100m considered committed capital instead? It isnt really invested yet since it is undrawn. Just done with this super long reading, hope i got it right… You’re telling me, I call it the never ending chapter! Chi Paul Wrote: ------------------------------------------------------- > Committed capital just means that investors have > committed to providing at it some point in the > future, it has not yet been called. So, not only > is that $100 MM not invested, the PE Fund doesn’t > even have it. okay that sort of makes sense but how can they commit capital the PE fund doesn’t have? So that $100M is definately defined as commited capital then?
mambovipi Wrote: ------------------------------------------------------- > okay that sort of makes sense but how can they > commit capital the PE fund doesn’t have? So that > $100M is definately defined as commited capital > then? Each of the investors (limited partners) has a piece of the $100 million in their bank accounts (or in a stock fund, or whatever), but they have committed to providing it to the General Partner of the fund when he needs it. Whenever that $100 million is needed the general partner issues a capital call (or drawdown) to the limited partners for their pro-rata share of the needed $100 million and they send it to him. He doesn’t want to call the capital before it is needed though. So, when I say the fund doesn’t have the money yet, I mean that they literally do not have the cash in hand because they have not yet drawn it down. Not sure if I am explaining that well… and am trying to avoid a soup to nuts explanation of the full life of a PE Fund. Does that help?
That does, thanks a lot.
I agree with everything above said, but I just want to add that in the CFAI book they actually say that carried interest is computed on committed capital (in the text), although they compute it on invested capital (in the example later). It confused me as well, because it doesn’t make sense to charge carried interest on something that was not yet withdrawn and invested.