What is 2% fee in private equity?

The fee structure employed by numerous private equity firms follows a two-and-twenty model, a practice that has become prevalent in the industry. This approach involves a dual layer of charges for fund investors.

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The first component of this structure requires fund investors to contribute 2% of the assets under management (AUM) annually. This percentage is levied as a management fee, covering the operational costs and expenses associated with managing the fund.

In addition to the management fee, a second layer of charges kicks in once the fund generates returns above a predetermined threshold known as the hurdle rate. This rate serves as a benchmark, and any returns exceeding it are subject to an additional fee.

Specifically, fund investors must pay 20% of the returns generated above the hurdle rate. This performance fee is designed to incentivize the fund manager to strive for superior returns and align their interests with those of the investors.