Hedge Funds, Venture Capital, and Private Equity

Hedge Funds, Venture Capital, and Private Equity Similarities in compensation structure for hedge funds, venture capital firms, and private equity investors

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Hedge Funds, Venture Capital, and Private Equity

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One thing I should probably make clear is that this idea of getting a 2 percent management fee and then
participating in the profits at around 20 percent - getting this 20 percent carried interest - this isn't
unique to hedge funds. This is actually the same compensation structure that you'll normally have at
a venture capital fund or a private equity fund. And just to be clear, venture capital really is a form
of private equity. But normally, when someone says "private equity" they're not talking about venture
capital in particular. In all of these situations, the managers will get roughly 2 percent on the - for
managing the fund they'll get 20 percent of the profits. The only difference, really, in terms of how it's
structured - and, a venture capital or a private equity fund will still have kind of a limited partnership
for the actual fund and then they would have a management company that gets the management fees and the
profits. The only difference is, because a hedge fund for the most part is probably going to invest in
public securities, it can get the money right from the get-go and put that money to work because it
tends to invest in fairly liquid assets that they can just go out and buy. So a hedge fund will normally
just take as much money as it needs to invest right from the beginning. A venture capital firm or a private
equity firm, what they'll to is say, look, "I'm going to raise a 100 million dollar fund, but I'm not
going to be able to just go out the door tomorrow and invest 100 million dollars. In the case of a venture
capital firm, they're going to have to look at entrepreneurs and do their due dilligence, same thing for
a private equity firm, they're going to have to look for companies they might want to buy. Private equity,
you're talking about more mature companies that maybe this firm thinks it can buy and turn around, maybe
some mature companies that need some money to grow really fast. Venture capital tends to be investing in
some guys and a business plan, or, maybe these smaller, more risky companies. But in either of these
situations they won't find them tomorrow, so what they do is they go to their investors and get their
investors to commit a certain amount of money. To say, commit 100 million dollars, and they'll get the
management fee. They'll get the management fee on what those investors commit, but they won't take the
money right then and there. They'll take the money as they need it - they'll do what's called a "capital
call" to their investors, saying, "Hey, I just found a good 5 million dollar investment, I now need this
percentage of what you committed to so I can go out and make this investment in the hedge fund," that's
not the case, all of it is up front. But it really is the same compensation scheme. And that's why if
you go to any fancy business school, you'll find that these are kind of the careers that, at least people
who are interested in...well, I don't want to give them any kind of characteristics...there's a bunch

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Hedge funds

Hedge Funds, Venture Capital, and Private Equity Similarities in compensation structure for hedge funds, venture capital firms, and private equity investors

Hedge Funds, Venture Capital, and Private Equity

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