Reference no: EM133113741
An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment period ends. Both funds expect to have $508,500,000 in capital commitments when the fund commences operations and both project a five-year cycle for startup and acquisitions. Capital flows are expected as follows:
Fund A
Contributed Capital Capital Returned Invested Capital
Year 1 $ 203,400,000 $ 0 $ 203,400,000
Year 2 305,100,000 0 508,500,000
Year 3 0 508,500,000
Year 4 101,700,000 406,800,000
Year 5 50,850,000 355,950,000
Fund B
Contributed Capital Capital Returned Invested Capital
Year 1 $ 305,100,000 $ 0 $ 305,100,000
Year 2 203,400,000 0 508,500,000
Year 3 0 508,500,000
Year 4 50,850,000 457,650,000
Year 5 101,700,000 355,950,000
Required:
a. What will total fees be for Fund (A)? For Fund (B)?
b. Would one of the fee structures cause the manager to want to hold the properties longer before selling than the other fee structure? if so, which one?