An analysis of HBS case Acme Trust (Private Equity finance).

1. Why is Warburg, Pincus proposing a different fee structure from the standard arrangement? A five forces analysis of the Private Equity Industry reveals that Warburg is shifting its fee structure to take advantage of limited customer bargaining power from its customers while trying to finance its access to increasingly scarce investment opportunities and deny it to its rivals through a price-war. Warburg, Pincus is proposing to shift its fee structure by lowering its carried interest …

…rate $2,000 Fund size ($ millions) 6 number of equal instalments 1.5% Management fee (1 or 1.5%) 20% Assets' growth rate (5, 20 or 35%) 20% Distribution Rate to investors 15% Carried interest (20 or 15% $ millions Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Accumulated Capital $333 $667 $1,000 $1,333 $1,667 $2,000 Management fee $5 $10 $15 $20 $25 $30 $30 $30 $30 $30 $30 $30 Accumulated Assets $328 $717 $1,179 $1,728 $2,382 $3,162 $3,764 $3,584 $3,411 $3,244 $3,084 $2,931 $2,814 Distributed funds $753 $717 $682 $649 $617 $586 $2,814 Accumulated distribution $753 $1,470 $2,152 $2,801 $3,417 $4,004 $6,817 Distributed Carried Interest $0 $0 $0 $0 $0 $0 $0 $0 $23 $97 $93 $88 $422 Total Fees' Cash Flow $5 $10 $15 $20 $25 $30 $30 $30 $53 $127 $122 $118 $422 Management Fee' NPV $124 Carried Interest's NPV $574 Total NPV $698 Assets' Growth Rate $ millions 5% 20% 35% 1.5% Management fee $124 $124 $124 15% Carried interest $19 $156 $602 Assets' Growth Rate $ millions 5% 20% 35% Compensation 1% + 20% $110 $300 $902 structure 1.5 % + 15% $143 $280 $725