How do management fees, hurdles, and carry work? And how does this differ between fund investments and direct co-investments? Are there ever exemption arrangements?
Why do we charge management fees and how are they charged?
We charge management fees in order to cover basic operational costs. Regardless of whether you're investing to a fund or directly co-investing into a company, we charge a 2% management fee (with some exceptions noted at the end of this article).
For example:
- For fund investments: if one was to invest $100,000 into any of our managed funds, management fees are 2% of that committed capital charged over 5 years (e.g., $2000 of the committed capital would go towards fees).
- For direct co-investment into companies: if one was to invest $100,000 into a company, they would be charged a management fee of $2000 (2% of $100,000) on top of their investment amount. This is a one-off fee paid upfront when transferring the capital.
What does carry mean?
Carry is defined as the profit share of an investment paid to the investment manager (ie Icehouse Ventures).
The amount of profit-share (carry) we take, and the point in time at which we start taking carry, will differ on the type of investment you're making (e.g., fund or co-investment) and how much you invest.
- For fund investments: once we've cleared a 5% or 8% compounding hurdle (fund-dependant) on your original investment, we become eligible for 20% carry on incremental upside.
- For direct co-investment into companies: at the point of realised returns, we take 5% carry on realised profits (returns paid out in excess of your original investment).
A numeric example to explain how an 8% compounding hurdle works (only applicable to funds):
Please note that not all of our funds have an 8% compounding hurdle, some have a 5% compounding hurdle instead. The logic below still applies but the calculations would differ.
Say, for example, you invested $100k in a fund:
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Scenario 1 (very simple):
- On Day 1 the fund inexplicably manages to return the full $100k to you. The hurdle is cleared, and we earn 20% carry on all future returns.
- On Day 1 the fund inexplicably manages to return the full $100k to you. The hurdle is cleared, and we earn 20% carry on all future returns.
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Scenario 2 (more complex):
- After 1 year the fund has returned no money, and the hurdle we need to return is $108k ($100k investment with compounding interest at 8% p/a).
- This lack of returns continues through to the end of year 2, where the hurdle has grown to $116,640. At that point, the fund returns $50k, so the hurdle is reduced to $66,640.
- There are no more returns for three years – the hurdle thus continues to compound, going from $66,640 to $83,947.21 across that time. At that point we return $80k to you, reducing the hurdle to $3,947.21.
- There are no further returns for five years. The hurdle which had reduced to $3,947.21 after the last distributions has increased to $5,799.75.
- Side note - At this point we would have returned $130k to you with no carry/profit share to date.
- We return $100k to you, $94,200.25 of which is ‘in the carry’ ($100k minus the $5,799.75). We are entitled to 20% ($18,840.05) of the sum which is in the carry.
- There are no returns for 3 final years and no ongoing hurdle (which has been previously cleared - at which point it disappears). There is then a final distribution for $50k, of which we get 20% / $10k.
The fund actively invests over 5 years, though the fund will be managed for 12-15 years. During this time, any exits that are achieved in the portfolio will be distributed to investors in real-time, so you could expect between 0 and 30 distributions depending on how the portfolio performs. In terms of liquidity outside that, investors are also able to sell secondaries in their fund units, which is a fairly common occurrence (though this is usually at a discount to holding value).
Are there ever exemption arrangements?
Exemption arrangements will occur for some investors who hold pre-existing positions in companies either directly or via our funds.
There will also be some co-investment offers that have fees and carry exemptions for all investors, regardless of whether they hold pre-exisitng positions in the company (these are context-specific and are up to the discretion of the company and Icehouse Ventures).
In situations where there are exemptions, this will be communicated to investors beforehand and also detailed in the investment confirmation when capital is called.