You work at Krannert Consulting and the company has been hired to advise OPERF on a proposal given by TPG. You and your team have been appointed to compute the financial benefits of each possibility offered and choose which one leads to higher expected profits. After a few considerations, your team decides to incorporate the following assumptions:

• The fund has a 10-year life, with committed capital of $20 billion.

• The funds are received in five equal installments, at the beginning of the first five years of the fund.

• The management fee is 1.5% of committed capital, payable at the beginning of the year.

• The fund’s invested assets grow at an expected rate of 20% each year.

• Starting at the end of Year 5, 20% of the investment portfolio is liquidated, and the proceeds are available for distribution to LPs and GPs.

• Assume a discount rate of 15% is appropriate for the risk of the fund cash flows.

• At the end of Year 10, all remaining assets are liquidated.

Step 1

If the only benefit proposed by TPG is a reduction of the management fee to 1.35%, what will be the effect on OPERF’s financial performance?

Spreadsheet I. Calculate the NPV for OPERF given a 1.5% management fee.

Spreadsheet II. Calculate the NPV for OPERF given a 1.35% management fee.

Compare OPFER’s expected gains from this reduction in management fees.

Step 2

Besides the reduction of the management fee to 1.35%, TPG offers two options to OPERF:

a) A hurdle rate of 8% per annum; or

b) A reduction in TPG’s carry from 20% to 15%

Spreadsheet III. Calculate the NPV for OPERF given a hurdle rate of 8% and a 1.35% management fee.

Spreadsheet IV. Calculate the NPV for OPERF given a carry of 15% and a 1.35% management fee.

Which option your firm would recommend to OPERF’s?