Alternative Investments. Hossein Kazemi
Читать онлайн книгу.
fees are paid regardless of the fund's performance and therefore fail to provide a powerful incentive to produce exceptional investment results. Excessive and quasi-guaranteed management fees stimulate tentative and risk-averse behavior, such as following the herd. Consequently, the carried interest, meaning the percentage of the profit paid to fund managers, is the most powerful incentive to align interests and create value. The most common carried-interest split is 80 %/20 % (a.k.a. 80/20), which gives the fund manager a 20 % share in the fund's net profits and is essential to attracting talented and motivated managers. These fees are asymmetric, as a fund manager shares in the gains of the investors, but does not compensate investors for any portion of their losses. (Note that the following examples ignore management fees for the sake of simplicity.)
Fund A at the end of its term has risen to a total net asset value (NAV) of $300 million from its initial size of $200 million. Assuming no hurdle rate and an 80 %/20 % carried-interest split, the general partner is entitled to receive carried interest equal to how much?
The answer is $20 million. The answer is found by multiplying the GP's share (20 %) by the total profit ($100 million). The total profit is found as the difference in the NAVs. The NAVs are calculated after adding revenues and deducting expenses.
Fund B terminates and ultimately returns $132 million to its limited partners, and the total initial size of the fund was $100 million. Assuming a carried-interest rate of 20 %, the general partner is entitled to receive carried interest equal to how much?
The answer is $8 million. Note that if $32 million is the profit only to the LP, the total profit of the fund was higher. The answer is found by solving the following equations: LP profit = 0.8 × total profit; so $32 million = 0.8 × total profit; therefore, total profit = $40 million. The second equation is GP carried interest = 0.2 × total profit; therefore, carried interest = $8 million.
3.5.4 Aggregating Profits and Losses
In the case of multiple projects within private equity funds, two approaches are used for determining profits and distributing incentive fees. Carried interest can be fund-as-a-whole carried interest, which is carried interest based on aggregated profits and losses across all the investments, or can be structured as deal-by-deal carried interest. Deal-by-deal carried interest is when incentive fees are awarded separately based on the performance of each individual investment.
Consider a fund that makes two investments, A and B, of $10 million each. Investment A is successful and generates a $10 million profit, whereas Investment B is a complete write-off (a total loss). Assume that the fund managers are allowed to take 20 % of profits as carried interest. How much carried interest will they receive if profits are calculated on a fund-as-a-whole (aggregated) basis, and how much will they receive if profits are calculated on a deal-by-deal (individual transaction) basis?
On the fund-as-a-whole basis, the fund broke even, so no incentive fees will be distributed. On the deal-by-deal basis, Investment A earned $10 million, so $2 million in carried interest will be distributed to the managers.
Participating in every investment's profit, or deal-by-deal carried interest, can be problematic because the general partner can make profits on successful investments while having little exposure to unsuccessful transactions. As the limited partners take the bulk of the capital risk, this approach significantly weakens the alignment of interests. A fund-as-a-whole carried-interest approach protects the interests of the LPs but may be less effective in attracting talented managers. The fund-as-a-whole scheme may entail the risk of frustrating the fund managers, as their rewards may be deferred for years until all deals can be aggregated. Carried-interest distribution is typically one of the most intensively negotiated topics. The amount of the payment is often not as much of an issue as the timing of the payment. In practice, carried-interest schemes include elements of both approaches in order to circumvent their respective limitations.
3.5.5 Clawbacks and Alternating Profits and Losses
Clawbacks are relevant to funds that calculate carried interest on a fund-as-a-whole basis. The idea of typical clawback provisions is that incentive fees distributed to managers are returned when a firm experiences losses after profits so that the total incentive fees paid, ignoring the time value of money, are equal to the incentive fees that would be due if all profits and losses had occurred simultaneously. Funds experience early profits and late losses in two primary instances. In private equity funds, it is possible that a few of the projects in which the fund has invested may successfully terminate and generate large cash inflows and profits to the fund. Other projects may fail at a later date, thereby generating large losses or write-offs. An important issue when a fund experiences large gains early in its life, followed by subsequent losses, is whether incentive fees paid on the early profits will be returned to the LPs.
Another instance in which losses follow profits is more common in the hedge fund industry, where market conditions or managerial decision-making can cause strategies to be highly successful in one time period and then highly unsuccessful in a later time period. In this case, the fund earns high profits followed by large losses.
In both cases, it is possible that incentive fees, or carried interest, could be paid during the earlier profitable stage, even though subsequent losses could cause the investment to have no profit over its entire lifetime. Thus, a limited partner could end up paying incentive fees for an investment that lost money over its lifetime. Clawback provisions are designed to address this problem for limited partners.
Consider a fund that calculates incentive fees on a fund-as-a-whole basis and makes two investments, A and B, of $10 million each. Investment A is successful and generates a $10 million profit after three years. Investment B is not revalued until it is completely written off after five years. Assume that the fund managers are allowed to take 20 % of profits as carried interest calculated on an aggregated basis. How much carried interest will they receive if there is no clawback provision, and how much will they receive if there is a clawback provision?
Without a clawback provision, the fund earned $10 million after three years and distributed a $2 million carried interest to the managers. When the second investment failed, the incentive fee is not returned. In the case of a clawback provision, the fund distributed a $2 million incentive fee to the managers after three years, but when the second investment failed, the incentive fee is returned to the limited partners, since there is no combined profit.
The goal of clawback provisions is to protect the economic split agreed between the GP and LPs. The clawback provision is sometimes called a giveback or a look-back, because it requires a partnership to undergo a final accounting of all of its capital and profit distributions at the end of a fund's lifetime. Clawback provisions are the opposite of vesting. Vesting of fees is the process of making payments available such that they are not subject to being returned.
A clawback provision is a promise to repay overdistributions, but such a promise is only as good as the creditworthiness of the GP. The GP is normally organized as a limited liability vehicle with no assets other than the interest in the fund. In the partnership agreements of many funds, the clawback provision simply binds the GP and requires his or her cooperation and financial support.
The sentiment that clawbacks are worthless is not uncommon. Situations arise in which LPs are unable to receive the clawbacks they are owed. Attempting to enforce the clawback provisions may lead to years of litigation without resulting in any return of cash. The simplest and, from the viewpoint of LPs, most desirable solution is to ensure that the GP does not receive carried interest until all invested capital has been repaid to investors. With this approach, however, it can take several years before the fund's team sees any gains, and it could be unacceptable or demotivating