Overview

This briefing by Wragge & Co focusses on fund management. Historically, fund managers have been paid in two ways, the so called "two and twenty model" - a 2% management fee and a 20% carried interest.

It is relatively common for fund managers to receive an annual management fee of 2% of funds under management. This was originally intended to cover overheads but, as property prices escalated and fund managers benefited from economies of scale associated with managing multiple funds, it became profitable in its own right.

It is also usual for fund managers to take share of the profits of the fund (usually 20%) once investors have received back their initial investment or, more commonly, that initial investment plus an agreed preferred return. This is known as the carried interest.

In addition, if the carried interest was structured in a certain way - and satisfied the strict requirements set out in an agreement between the British Venture Capital Association and HM Revenue & Customs (the MOU) - then the fund manager may also benefit from the carried interest being taxed as a capital gain rather than as income.

However, this arrangement has long been the subject of criticism and, given recent moves to increase the taxation of bonus arrangements in the financial services industry, it remains to be seen how long it takes before the MOU comes in for further scrutiny.

This briefing assesses recent trends including fee level, co-investment, clawback and whole fund-based calculations, underwater concerns and transparency as well as more sophisticated hurdles.

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