Meghvik Capital runs a Rs 250 crore fund on a 2% fee. Does the fee cover the team, and what would each partner earn in carry if the fund returns 2.5x gross?

The fee only just covers the team: Rs 5.00 crore in against Rs 4.95 crore out, Rs 5 lakh spare. At 2.5x gross the fund makes Rs 375 crore of profit, carry is Rs 75 crore, and each partner receives about Rs 26.2 crore. The partners are working for carry; the fee keeps the firm open and nothing more.

Think of a restaurant whose table charges exactly cover rent and wages. The owners eat only if the food is good enough to bring the profit. A management feeA yearly charge, usually a percentage of the money investors have committed, paid to the fund manager to run the fund whatever its results. is meant to be the table charge: it pays for running the fund, not for getting rich. Meghvik earns 2% of Rs 250 crore, Rs 5.00 crore a year. Its costs are Rs 2.4 crore for the partners, Rs 1.0 crore for the associates, Rs 0.25 crore for the analyst and Rs 1.3 crore for the office, Rs 4.95 crore in all.

That leaves Rs 5 lakh, about 1% of the budget. Turn it round to find the smallest fund this team can afford: Rs 4.95 crore divided by 2% is Rs 247.5 crore. Meghvik is sitting almost exactly at its break-even fund size, so the fee is not a profit centre at all. Many fee schedules also step down once the investment period ends; if Meghvik's fell to 1.5%, the same team would cost Rs 1.20 crore a year more than the fee brings in, and the partners would cut their own salaries or the team.

Follow the money out in order. A 2.5x gross return on Rs 250 crore is Rs 625 crore. The LPs first get their Rs 250 crore back, leaving Rs 375 crore of profit. Carried interestThe share of a fund profit paid to the manager, usually 20%, after investors have their capital back. It is the part of a VC partner pay that depends on results. is 20% of that, Rs 75 crore, and the LPs keep Rs 300 crore. The partners take 70% of the carry, Rs 52.5 crore, which is Rs 26.25 crore each.

Two things, and an interviewer will ask about both. First, the 2.5x was applied to the whole commitment, but the fees come out of that commitment too. Over a ten-year life a flat 2% takes Rs 50 crore, so only Rs 200 crore is actually invested. If the 2.5x is earned on invested capital rather than committed capital, proceeds are Rs 500 crore, carry falls to Rs 50 crore and each partner gets Rs 17.5 crore, a third less.

Second, timing. The salary arrives every month; carry arrives, if at all, in years eight to twelve, after the LPs are repaid, and only if the fund actually returns more than its capital. A fund that returns 1.0x pays zero carry however hard the team worked. That is the design: LPs want the partners to be comfortable enough to stay and hungry enough to care. Close with the view that this fund is thinly staffed for its size, and that a partner here is betting most of a decade's pay on the portfolio.