The British Private Equity and Venture Capital Association (BVCA) tries to defend private equity model. According to the Association, many financial media misunderstand the way a private equity fund operates.
It is standard practice for private equity funds to return invested capital plus expenses (including the management fee) to investors before carry is paid out. On most large European buyout funds management fees are nearer 1.5% than 2% and carry is paid only when a hurdle rate of return has been reached.
Tough times ahead may necessitate renegotiations between private equity firms and their investors, but even in these cases the model will continue to work because interests remain aligned. This efficient alignment of interest between investors and funds means that, unlike the public company model,
rewards are only available for success, not failure.
L.D.