Re:The venture capital model is broken, and this damning rep...
by tomkarlo on Monday May 07, 2012 @09:05PM
(#3941701)
Given that investors were already paying ~2% management fees during the life of the fund, paying a few points a year while the VCs try to liquidate the remaining assets doesn't seem like that big a deal. The remaining assets are probably less than 10% of the original fund size in terms of their cost basis, so you're talking about an ongoing fee that's less than 10% of what they were already paying.
The alternative would be to fire-sale the assets when the fund closes, which would probably cost the investors a lot more.
Longer fund lives are an expensive trend for LPs, who often are asked to pay additional management fees for a fund that extends beyond ten years. Many funds have several companies left in the fund at the ten-year mark, and demand additional fees, frequently based on the value of the portfolio (e.g., 1.5 percent of the cost basis of the remaining portfolio). The alternative available to LPs is to receive a FedEx package of private company share certificates. Which of the two evils is lesser?
Context: VCs market funds to LP with a lifetime of 10 years, but usually can't liquidate all their holdings in that time frame; they apparently then go on to charge management fees during "overtime".