A complete interpretation of several typical methods of income distribution between GPs and LPs in private equity funds (recommended useful information!)

A complete interpretation of several typical ways of income distribution between GPs and LPs in private equity funds (recommended useful information!) How GPs and LPs in private equity funds distribute income is the core content of the equity fund agreement。The usual agreement is that the LP pays the GP an annual management fee of 2%-3% and a management dividend of 20% of the profit.。But even these common conventions，In fact, there is a huge difference。

annual management fee，The annual management fees calculated for equity funds with different bases appear to be similar.，All are between 2%-3%，but actually not the same。Some use the amount of paid-in capital as the basis for calculation.，Some calculations are based on the amount of capital subscribed.，Some directly arrange the management fee points for each year，Some are more complex。The following is a comparison of the regulations on management fee base of several well-known funds.。

management dividends，Different ways ▶The first way：Overall allocation，It is impossible for all the projects invested by private equity funds to be profitable after repaying the capital first and then distributing profits.。If profitable projects are allocated first, they will be allocated according to the "28" principle，If a project suffers a loss, the investment principal of a certain project may not be fully recovered.。In order to ensure that the investment income allocated to GP is net profit，Many funds stipulate that the investment principal must be recovered first，Only when profits are made can dividends be allocated to GP management。

This distribution method is also called "recovering the capital first and then distributing profits"，This distribution method is more inclined to protect the interests of LP。Under such circumstances, GP’s profit period will obviously be postponed.。For example, a limited partnership agreement stipulates as follows regarding profit distribution:："The principal should be recovered first within the operating period，That is to say, the general partner can only withdraw the management performance share after the fund has fully recovered the actual investment amount (principal).。

That is, when the actual cash income obtained by the fund exceeds the actual capital contribution (principal) of the fund，The general partner has the right to participate in the distribution of the net profit of the value-added portion of the investment project as its performance reward according to the following calculation method:：Performance reward during the period = Fund net profit：Assigned by individual project，Reserved margin is allocated according to individual investment projects，At the same time, the GP reserves part of the management dividends it obtains in the equity fund as a deposit.，Used to claw back losses when other projects suffer losses，It is also a relatively common allocation method among equity funds.。

Reservation as margin generally accounts for 40-50% of management dividends。

For example：A certain limited partnership agreement stipulates："When an investment project is exited，And when the income of the project exceeds the project cost × (1+8% × the number of investment years of the project)，That is, 20% of the excess amount will be accrued as a performance reward to the general partner.，50% of which can be actually distributed，The other 50% is retained in the company as risk reserves and managed in a special account，Compensation for the difference used for liquidation of performance awards when the partnership expires。

》▶The third way：by single item，And the cost of individual projects is calculated, and individual funds are allocated according to individual projects.，But at the same time, the investment principal of a single project is calculated and deducted.、Management costs and principal losses recognized on previous loss items。

For example, a limited partnership agreement stipulates，"For project investment income from the fund's distributable funds，should be deducted：

1. The limited partner’s share of the investment capital of the project that has been withdrawn from the fund is calculated based on the capital contribution ratio.；
2. The limited partner’s share of the investment principal losses on loss-making projects held by the fund that have been previously confirmed by the general partner is calculated based on the proportion of capital contribution.；
3. The actual capital contribution of the limited partner is allocated to the management of the project

cost

。

Then，20%Assigned to General Partner，80%Distributed among limited partners according to actual capital contribution ratio。」

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