There are two VC funds set up for ten years with $800 million committed capital each. Fund A has the following characteristics: A constant management fee of 2% and carried interest of 80-20. Fund B is as follows: Preferred return of 8% per year. A decreasing management fee (2% in the first 4 years, 1% for the rest) and carried interest of 60-40.
1. Suppose all investment capitals are invested at t=0 and both funds have the same internal rate of return (per year) of 30% on investment capital. The LP maximizes payoff in year 10. Which fund is better for the LP and how much more can the LP get by choosing the better fund?
2. What is the total payoff (including all fees) for the GP of fund A and B, respectively?