CFA Practice Question

There are 139 practice questions for this study session.

CFA Practice Question

A private equity firm has a fee structure of 2 and 20. Five LPs have agreed to provide a total of $100 million to the firm. During the first year of operation, only $30 million is called by the GP for the firm's investment needs due to lack of investment opportunities. There's no investment profit realized during the year. The management fee charged by the GP at the end of year 1 should be:

A. $0.
B. $ 0.6 million.
C. $ 2 million.
Correct Answer: C

The management fee is based on committed capital, not invested capital. In most private equity funds, investors commit capital rather than invest capital. A firm may not invest a single dollar for two years, but based on the committed capital of $100 million, $2 million a year is paid as management fees to sift through investment opportunities.

User Contributed Comments 4

User Comment
ankurwa10 i disagree with this. Most firms use capital contributions, which is the money i am actually managing. simply because an investor could default on capital call notices etc. I can charge operational expenses etc on commitment (even there the case for using called capital) is strong.
ascruggs92 Answer the question based on what's provided in the notes, not personal experience
jfermin315 lol
cfastudypl well said ascruggs92 as some people may have to have their own AN website and not be here.
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