An investment firm specializing in private equity is raising a new fund with a target size of $500 million. The general partner (GP) commits 2% of the fund's capital, and the Limited Partners (LPs) commit the remaining 98%. The fund charges a 2% management fee on committed capital annually and has a 20% carried interest with an 8% hurdle rate. In the first year, how much will LPs pay in management fees?

Question: An investment firm specializing in private equity is raising a new fund with a target size of $500 million. The general partner (GP) commits 2% of the fund's capital, and the Limited Partners (LPs) commit the remaining 98%. The fund charges a 2% management fee on committed capital annually and has a 20% carried interest with an 8% hurdle rate. In the first year, how much will LPs pay in management fees?

Answer options: ✅ $9.8 million

• $10.0 million
• $9.6 million
• $10.2 million

Correct answer: $9.8 million

Explanation: The total committed capital is $500 million. The LPs commit 98%, which is $500M * 0.98 = $490 million. The management fee is 2% of this committed capital. So, LPs will pay $490 million * 0.02 = $9.8 million in management fees in the first year. The GP's commitment is not subject to management fees from the LP perspective.