FEES AND COMPENSATION
A. Advisory Fees and Compensation
Separately Managed Accounts. We may agree to manage a separate account for a
client. We generally base our advisory fees on a percentage of assets under
management, and we generally include a performance fee. Fees paid by separate
account clients vary depending upon the nature of the advisory service, the size of the
account and other pertinent factors. Previously, we provided non-discretionary advisory
services to a department of the United States federal government for a separate account
that consisted of convertible preferred shares and equity warrants of U.S. banks. For
this account, we charged, for one assignment, a monthly fixed fee determined based
upon the nature of the services provided, and for a second assignment, a monthly fixed
fee based upon the number of issuers of securities assigned to us by the client.
Hedge Fund Fees. We charge the Hedge Fund both a fixed management fee and an
incentive fee or profit share. The fixed management fee is a monthly fee, payable at the
beginning of the month. This monthly fee equals 1/12th of 2% of the net asset value of
the Hedge Fund measured as of the first business day of the month (2% per year). The
incentive fee or profit share is payable at the end of each year and also at the time of a
redemption or withdrawal. This fee or profit share equals 20% of the net new
appreciation in an investor’s account, measured as of the end of the year (or measured
as of the date of a redemption or withdrawal).
Private Equity Fund Fees. We charge the Private Equity Fund both a fixed
management fee and a profit share. The fixed management fee is a quarterly fee,
payable at the beginning of the quarter. Until the end of the Private Equity Fund’s
investment period, this fee equals 1% annually of the total Fund capital commitments.
Thereafter, the fee equals 0.5% annually of an amount equal to (i) the aggregate cost
basis of all investments (other than cash and cash equivalents) then held by the Fund
less (ii) the aggregate cost basis of all such investments that have been written off as
worthless for U.S. Federal income tax purposes, measured at the beginning of each
fiscal quarter. The profit share is equal to 10% of the Private Equity Fund’s net profits,
payable only after investors have received a return of their invested capital and an 8%
compounded annual return on their invested capital.
Private Fund Fees and Other Terms May Vary for Some Investors. We anticipate
that we and a Private Fund will, from time to time, enter into agreements with certain
investors, including our employees and affiliates, that provide for terms of investment
that are more favorable than the terms described in a Private Fund’s offering
memorandum. Such terms may include lower fees, more favorable withdrawal or
redemption rights, and providing additional information or reports. No such agreement
will entitle any other investor to the same terms of investment.
Explanatory Note Regarding Hedge Fund Master-Feeder Structure. The Hedge
Fund is organized in a master-feeder structure. The master fund, which is organized
offshore (the “Master Fund”), holds the Hedge Fund’s investment portfolio. Our clients
invest through a U.S. feeder fund or an offshore feeder fund (each, a “Feeder Fund” and,
together with the Master Fund, the “Hedge Fund”). The Feeder Funds in turn invest in
the Master Fund.
Explanatory Note Regarding Incentive Fee and Profit Share Payments. We serve
as the investment manager for the Hedge Fund and the Private Equity Fund. Our wholly
owned subsidiary serves as the general partner for the Hedge Fund’s U.S. Feeder Fund.
A different wholly owned subsidiary serves as the general partner for the Private Equity
Fund. The Private Funds pay incentive fees directly to us. The Hedge Fund’s U.S.
Feeder Fund and the Private Equity Fund pay a profit share, rather than an incentive
fee. They each pay the profit share to their general partner (the “General Partner”).
Since each General Partner is our wholly owned subsidiary, profit share payments go to
us, indirectly, through the General Partner.
Regulated Status of a General Partner. As our subsidiary, a General Partner is
subject to the Investment Advisers Act of 1940 (the “Advisers Act”) and related SEC
rules to the same extent as a registered investment adviser. Although the General
Partners are not registered with the SEC, they are subject to examination by the SEC,
when the SEC examines us. The General Partners, and our employees acting on behalf
of the General Partners, are subject to our supervision and control.
B. Payment of Fees
Separate Accounts. For a separate account, we bill the client for our fees. We do not
deduct the fees from a separate account. Frequency of billing is agreed with the client.
Private Funds. For the Private Funds, we bill the client (meaning we bill the Private
Fund) for our fees. Since we manage the Private Funds, which includes managing the
payment of Private Fund expenses, we effectively pay ourselves these fees out of the
Private Fund’s account. The fee invoices that we submit to the Private Funds serve to
create an accounting record that is subject to audit.
Hedge Fund. The Hedge Fund pays the fixed management fee monthly. The Hedge
Fund pays the profit share or incentive fee from an investor’s account annually or at the
time of a withdrawal or redemption.
Private Equity Fund. The Private Equity Fund pays the fixed management fee
quarterly. The Private Equity Fund pays the profit share only after investors have
received a return of their invested capital and an 8% compounded annual return on their
invested capital. After that point, the Private Equity Fund pays the profit share each time
that the Fund makes a distribution to investors.
C. Additional Fees and Expenses
Separate Account. A separate account client will incur brokerage fees and custodial
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