A 2% management fee may be the venture industry standard. But today, it appears that a majority of firms use something different.
Those were the findings in a survey of prevailing investment terms among private equity firms published this month by Thomson Reuters (publisher of VCJ). The survey, which included input from 45 North American venture firms, found that 45% of these VCs charged an annual management fee equivalent to 2% of committed capital. Thirty percent charged a fee greater than 2% and less than 2.5%, while 10% charged even higher amounts. Only 15% charged less than 2%.
The survey also unearthed a few other marked differences in the terms venture firms extend to their limited partners, including:
- Speed of cash distributions: When a venture fund has cash on hand from a successful exit, limited partners generally like to see a share of the proceeds as quickly as possible. But some VCs can make them wait longer than others. The survey found that just 22.5% of North American VCs queried require cash distributions to LPs promptly after receipt. Many more – 40% to be precise – leave it up to general partners to determine when to distribute cash. About 28%, meanwhile, require distributions within 90 days of receipt.
- Recycling provisions: At a number of firms, GPs can take some proceeds from an exited investment and deploy the money in new deals. The survey found that 73% of North American VCs had some sort of recycling provision, as did nearly half of the 11 international VCs surveyed.
- Bridge financing: Even promising portfolio companies often face difficulty and delay in closing much-needed investment rounds, requiring them to seek interim financing. More often than not, VCs have the option to help out. Sixty-two percent of VCs surveyed in North America said they allowed some bridge financing, as did 72% of international VCs.
- Waiting for final close: The time it takes to reach a final closing after an initial close varies pretty widely from fund to fund. For the speediest fundraisers – 13% of VCs surveyed – it took six months or less. For 43%, it took six months to one year, while another 27% took up to 18 months. About 16% took longer or did not specify a time frame.
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