rachet and give me 500 share

I joined a private fund as a GP, but this fund invests IBM share, the LP says if my performance is good, he gives me 500 share of IBM, is this a rachet or tag-drag along ?

it is neither. it is simply a bribe…

so what is ratchet? does it mean LP gives me the private fund’s own share?

ratchet has nothing to do with shares, as far as I remember. I am now referring to my notes… ratchet is the distibution of equity between shareholders and mgmt team… it does not mean that shares are sold… Mgmt can increase its equity allocation (invest more) based on company’s actual performance and return achieved by the PE Firm.

oh, no. as I remembered, in private equity firm, management didn’t invest, they get salary and carried interest, only investor invest called down, say 300 mil, so how equity allocation is adjusted? in my above senario, is 500 share of IBM a tag along and drag along?

‘Ratchet’ is when management of the acquired private company is allowed to increase its equity share, based on its performance. When private Equity Fund wants to sell out its Equity Share in a given Private Equity firm (usually at the time of exit). ‘Tag along Dag along’ lets the Management of that Private Equity firm have the first or equal right to buy those shares.

yes, I know the definition, I just want to make concepts easy to understand by using layman term, so every candidate here benefit. forget about rachet, now Investor in my private fund firm invest 30 mil in 2008(called down) and 50 mil in 2009(called down),but commited capital is 120 mil, it seems commited capital is larger than 80 mil(cumulative called down), so where does the leftover go? in 2008, my performance fee is 3 mil and performance of fund is 10 mil in 2009, my performance fee is 5 mil and performance of fund is 15 mil but when I calculate my carried interest, do I need to substract distribution first?

Here, you are interchanging the definitions of ‘Invested Capital’ and ‘Committed Capital’. When investors (LPs) put in their funds, the total funds thus collected is called ‘Comitted Capital’. And when GP starts to invest (calls down) from these funds in specific Private Equity Firms, is called ‘Invested Capital’. So, committed capital for the fund is 120m. GP has invested 80m out of it in 2 years. Remaining 40m is still with the fund, uninvested. > but when I calculate my carried interest, do I need to substract distribution first? Carried Interest, to be paid to GP, is calculated based on rules specified in the prospectus. Yes, values calculated are before paying corresponding distributions to LPs.

I think something not correct. that assume, I work in Fidelity, Fidelity’s boss invest commited capital 120mil in year 2003, me, as a Fund manager, is GP, and I don’t invest single cent, the fidelity’s mutual fund holder invest called down(total 80 mil), this 80 mil is nothing related to do with 120mil. my carried interest as follows: Fidelity has the rule of hurdle rate 20%, so do i need to compare my performance 10+15mil with commited capital 120mil or cumulative called down in order to corss the hurdle ? is my carried interest : (30+50-3-5+10+15)*20% (carried interest percentage)?

Looks like your definitions of invested capital, committed capital, Private Equity fund, Private Equity Firm, GP, LP, carried interest, ratchet …etc are little mixed up. I suggest you look into the text.

Do i mixed up? assuming fidelity is doing ventral capital fund, I’m working as a fund manager, i just want to make sure carried interest is ok. your expected answer is very pratical and value added

Okay, if you are the fund manager, that is you are the GP, then any capital you drawdown from the fund to invest in PE opportunities, is called ‘Invested Capital’. And the Capital that investors to your fund put in, is called ‘Committed Capital’. Now, assuming you understand these definitions: your following statement does not make sense: > the fidelity’s mutual fund holder invest called down(total 80 mil) It is GP who calls down capital from the fund for investing in PE opportunities and not Investors (the LPs).

OK, OK, so called down means dradown. actually, I want to know besides LP and GP, do we have third party, say investors? committed capital is from third party and LP together, not only LP

> actually, I want to know besides LP and GP, do we have third party, say investors? Investors in a PE fund ARE LPs. If it is a mutual fund investing in a PE fund then it is a different story.

rus1bus Wrote: ------------------------------------------------------- > ‘Ratchet’ is when management of the acquired > private company is allowed to increase its equity > share, based on its performance. > rusbus1 Writing from memory so might be a bit imprecise: Ratchet is used as performance incentive tool in firms VC/PE funds invest in, where the management is awarded predefined number of shares (upon exit) depending the exit share value. Normally, the bonus/number of shares is ‘ratcheted’ up, the higher the share price is. > When private Equity Fund wants to sell out its > Equity Share in a given Private Equity firm > (usually at the time of exit). ‘Tag along Dag > along’ lets the Management of that Private Equity > firm have the first or equal right to buy those > shares. In PE/VC environment context, Tag along is the right of minority shareholders to receive the same exit as the major shareholders (normally PE firms). Drag along is the right of major shareholders to drag minority shareholders toward an exit (i.e., force minority shareholders to accept offers at the same term as the majority shareholders.) >And the Capital that investors to your fund put in, is called ‘Committed Capital’. Committed Cap is not necessarily put in in your fund yet, but just a (legal) promise from fund investors. It is only when the GP calls down, the LP will transfer the requested amount to the fund (to be invested in companies). This is (has been) a major problem for US endowments recently (e.g., Yale, Harvard) who invest heavily in PE funds. When the economy is down, the PE firms need more money for their investments, and calls down committed capital from those endowments forcing those endowments to sell significant proportion of their bluechip stocks (in a down market) to fulfill their promise/commitment.

Great to see your post elcfa. Thank you for these very useful insights.

Thanks for sharing. for total return method and deal by deal method, are they all belong the category of waterfloor distribution scheme? why total return is better than deal by deal for LP?

rus1bus Good to see you again. It has been a while. Just dropping in shortly now in a few posts. Don’t think I can stay long because of time constraint. Seeing that you are still active helping your AFers. >for total return method and deal by deal method, are they all belong the category of waterfloor distribution scheme? why total return is better than deal by deal for LP? francisgy This must be new readings since I don’t remember reading about it when I took the exam, but again my memory is notoriously leaky, so I am quoting from experience: - you must mean the waterfall method which defines how the mechanism of the ratchet. In this case, the waterfall can be used either on a deal to deal basis or for the total return. Having said that, I have not seen it used for the GP (as you seem to imply). Does not mean it does not happen. - Bonus based on total return must be better for deal to deal for the investors(LP) since VC investments are notoriously inconsistent. They aim for a few home runs which make up for a lot of duds, so if you apply deal to deal, the GP will get a lot of bonus for their homeruns and not penalized for duds --> they get nothing for duds, but in total return schene, their bonus gets deducted for duds. Talking in academic terms, the GPs get free call options under the deal to deal scheme at the cost of the LPs.

elcfa, I am writing L2 this Jun. This forum has been a good place to reinforce learnings and get corrected in the process several times :slight_smile: Your finding time to help us is much more selfless. I would want to be in touch with you. If you find it appropriate, you can email me a line at srastogi999 at yahoo.com francisgy, Sorry to hijack your post.

rus1bus Have already shot you an email to your email address