Item 5. Fees and Compensation
Advisory Fees and Compensation
As further explained below, all fees charged to Vertical Capital’s advisory clients are disclosed
in the relevant offering documents, with respect to the CDOs and the Private Investment Funds,
or the relevant investment management agreement, with respect to the Separately Managed
Accounts.
SEPARATELY MANAGED ACCOUNT AND PRIVATE INVESTMENT FUND FEES
In certain circumstances, Vertical Capital is entitled to an annual management fee equal to up to
1.5% per annum (the “Management Fee”) based on the estimated fair market value of the client’s
assets and payable in cash quarterly in advance or in arrears depending on the arrangement with
the specific client. Vertical Capital GP, LLC and Vertical Capital GP II, LLC, each an affiliate
of Vertical Capital, currently serve as the general partner or special limited partner of Vertical
Capital’s Private Investment Fund clients (these two general partner entities are collectively
referred to herein as “Vertical Capital GP”) and may receive a “Carried Interest” or a
performance-based allocation up to 30% of each distribution of distributable cash after limited
partners in the Private Investment Fund have received 100% of their capital contributions to the
Private Investment Fund. In some cases, the Carried Interest may be a percentage of
distributions after the limited partners have also received a preferred return (with no “catch-up”
provision).
Notwithstanding the above, Vertical Capital or its affiliates may, in their sole discretion, reduce
the Carried Interest charged by the Private Investment Fund to certain affiliated, large or
strategic Limited Partners.
CDO FEES
Vertical Capital is generally entitled to receive a number of levels of compensation for the
administrative and investment advisory services that it provides to the CDOs. The basic fee
schedule that Vertical Capital may receive for the advisory services provided to the CDOs is set
forth below, although it should be noted that a complete description of the remuneration that
each CDO will pay to Vertical Capital is set forth more fully in the offering documents (the
“CDO Offering Documents”) and indenture (the “Indenture”) governing the relevant CDO.
CDO fees are not negotiable.
Senior Collateral Management Fee
Vertical Capital is generally entitled to receive a senior collateral management fee, which ranges
from .02% to .30% per annum of the aggregate collateral balance of the CDO (the “Senior
Collateral Management Fee”). The Senior Collateral Management Fee is generally paid to
Vertical Capital after the Issuers are compensated for certain fees and expenses, but prior to
payment of interest on the Secured Notes.
Subordinated Collateral Management Fee
Vertical Capital is generally entitled to receive a subordinated collateral management fee, which
ranges from .02% to .35% per annum of the aggregate collateral balance of the CDO (the
“Subordinated Collateral Management Fee”). The Subordinated Collateral Management Fee is
generally paid according to the CDO payment hierarchy and schedule, as set forth in the
Indenture.
Incentive Collateral Management Fee
Vertical Capital may receive a performance based fee as part of its compensation from a CDO.
For deals that provide for a performance based fee, Vertical Capital receives a percentage of the
profits (ranging from 10% to 20%) that are paid to the holders of the most junior Subordinated
Securities or “equity class” (the “Incentive Collateral Management Fee”). The Incentive
Collateral Management Fee is paid to Vertical Capital after the holders of the Secured Notes are
paid their principal and interest, and after the holders of the most junior Subordinated Securities
or “equity class” receive an internal rate of return that exceeds a pre determined benchmark rate
of return.
Vertical Capital may receive an Incentive Collateral Management Fee from the following CDOs:
Vertical CDO 2003-1, Ltd.
Vertical ABS CDO 2005-1 Ltd.
Vertical ABS CDO 2006-1 Ltd.
Vertical ABS CDO 2006-2 Ltd.
Summer Street 2005-1 LTD
E*Trade I ABS CDO Ltd.
E*Trade III ABS CDO Ltd.
E*Trade IV ABS CDO Ltd.
E*Trade V ABS CDO Ltd.
Closing Fee
Vertical Capital may also receive a closing fee (“Closing Fee”) as success based compensation
related to the closing of a CDO. A Closing Fee paid to Vertical Capital generally ranges from
$100,000 to $1,000,000.
Warehouse Carry Fee
During the period from the beginning of acquiring the CDO Collateral Securities to the issuance
date of the CDO (i.e., the warehousing period) for certain CDO transactions (as disclosed in the
applicable CDO Offering Documents), Vertical Capital may also receive a warehouse carry fee
(the “Warehouse Carry Fee”) generally equal to the Senior Collateral Management Fee, based on
the aggregate value of CDO Collateral Securities acquired during the warehousing period.
Payment of Fees
With respect to certain Separately Managed Accounts, Vertical Capital receives a quarterly
Management Fee. Upon agreement between the Separately Managed Account client and
Vertical Capital on the Management Fee for a given quarter, the client remits such Management
Fee to Vertical Capital in accordance with the terms set forth in the applicable investment
management agreement.
With respect to CDOs, Vertical Capital typically receives the Closing Fees and Warehouse Carry
Fees from the Placement Agent at the time of closing. Each of the Senior Collateral
Management Fee, Subordinated Collateral Management Fee, and Incentive Collateral
Management Fee is typically sent by the Trustee pursuant to each CDO’s payment priority
schedule.
Other Fees and Expenses
In general, Separately Managed Accounts and Private Investment Funds bear other expenses
...