Accel Partners VII
Steven N. Kaplan1
Graduate School of Business, University of Chicago
As the summer of 1999 began, Julie Robins, the chief investment officer of the Angel Foundation, was considering whether to invest in Accel Partners’ latest venture capital fund – Accel Partners VII. Accel was seeking to raise $500 million. The Angel Foundation had been a limited partner (investor) in Accel’ previous three funds – Accel Partners IV, V, and VI. Those s
funds had generated returns well above those typical for venture capital funds. In fact, the net returns to limited partners on Accel Partners IV and V were running above 100% per year. Exhibit 1 provides a recent record of historical returns for venture capital funds by vintage year. While 100% plus returns were obviously spectacular, Julie was concerned that Accel had decided to raise the fees it would charge its limited partners. In its previous fund, Accel had charged a management fee of 2.5% and a carried interest (or profit share) of 25%. This already exceeded the industry standard of 2.5% and 20%. In Accel Partners VII, Accel proposed to raise the carried interest to 30% of profits. James W. Breyer, Accel’ managing partner, argued that: s
“the higher profit share would help it retain and attract new talent. We have the same investment team that has been investing the last three Accel funds, and at the same time, we have greatly strengthened the team with new additions … ”2 At a 30% carry, Accel would join a select group of private equity firms that included Bain Capital, Kleiner, Perkins, Caulfied & Byers, and, under some circumstances, Benchmark Capital.
The Structure of Private Equity Partnerships3
Private equity partnerships (PEPs) are compensated primarily through a management fee and through a carried interest or profit share.
Some information and facts have been disguised. Copyright @1999 by Steven N. Kaplan. Private Equity Analyst, July 1999.
This section is based in part on and borrows from Gompers and Lerner (1999), Lerner (1996), Mercer (1997), and Sahlman (1990).
Management fees are used to pay for the ongoing operating expenses of the partnership. . The fees are typically payable quarterly in advance. The “typical” arrangement for management fees is for a fund to charge an annual fee of 1.5% to 2.5% of total committed capital. Less frequently, management fees are calculated based on invested capital or on net asset value. It is common for the management fee to decline in the later years of a fund – e.g. from years 7 to 12. The carried interest is the share of the fund’ profits received by the general partner / s
PEP. The most common carried interest split is 80/20, with 20% of profits going to the PEP. Gompers and Lerner (1999) report that over 80% of private equity funds charge a carry between 20% and 21%. According to Mercer (1997), “the 80/20 split is attributable to the early years of the private equity industry where a 20% carried interest was considered to be a substantial incentive for the general partner’ performance.”
The carried interest, in turn, is then divided among the individual members of the PEP. The division is generally not disclosed in a fund’ offering memorandum. . s
There are three traditional methods for computing the carried interest: deal-by-deal, aggregation, and hurdle rates. Under the deal-by-deal method, the PEP would have a carried interests in the profits of each individual deal. While more common in the 1980s, this method was rarely used in 1990s partnerships.
Under the aggregation method, a fund’ entire portfolio is aggregated. The PEP receives s
a carried interest in the profits of the entire portfolio. This method generally relies on one of two different calculations to determine the timing of the PEP carry. In the first type of calculation, the PEP does not receive its carry until the PEP has returned the fund’ total committed capital to s
References: Gompers, Paul and Josh Lerner, 1999, The Venture Capital Cycle. (Cambridge, MA: MIT Press).
Lerner, Josh, 1996, Acme Investment Trust, Harvard Business School, Case 9-296-042.
Lerner, Josh, 1998, A Note on Private Equity Partnership Agreements, Harvard Business School, Case 9-294-084.
Mercer, William M, 1997, Private Equity Survey and Key Terms.
Private Equity Analyst, 1999, “With Fund VII, Accel Partners Asking for 30 Percent Carry Fee,” July.
Sahlman, William, 1990, “The Structure and Governance of Venture Capital Organizations” Journal of
Financial Economics 27, 473-521.
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