Consider a $30 million enterprise value acquisition financed with $20 million of debt and $10 million of equity. The independent private equity sponsor negotiates the LOI and brings the deal to a syndicate of accredited investors.
At closing
The sponsor charges a 3 percent transaction fee on the equity, or $300,000. Investors fund $10 million minus the fee structure agreed in subscription documents.
During the hold
An annual management fee of $200,000 is paid by the portfolio company to the sponsor. This is typically expensed at the operating company level, not drawn from investor capital.
At exit
Assume a five-year hold and a $60 million exit. After paying off remaining debt, equity proceeds are $45 million. Investors first receive their $10 million back, plus an 8 percent preferred return compounded (roughly $14.7 million). The remaining $20.3 million is the promote pool. With a 25 percent promote, the sponsor receives about $5.1 million; investors take the remaining $15.2 million on top of their preferred return.
Net to investors: roughly $24.9 million on a $10 million investment, a 2.5x multiple over five years. That is the alignment in action.
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