PE fees fees in private Equity are designed to align interests between the investors the PE fund and portfolio companies.

Most PE funds are enumerated by share in the profits generated by the fund, which is referred to as carried interest as well as a management fee.

The most common combination termed quote-unquote 2 and 20 meaning 2% annual management fee on committed capital and 20% carry on profits over a certain agreed hurdle rate.

Often this is 8% irr or annualized return.

This equates to investors receiving 80% of profits on the underlying Investments.

The management fee is charged during the investment period on committed capital and therefore is based on the net invested Capital often at a reduced rate.

The carried interest is calculated either on a deal by deal basis or after all called Capital has been returned to the LPS.

Not all employees of the private Equity Firm will have carry but as you progress in seniority, it is usual to become part of the carry scheme. There's a waterfall mechanism whereby profits are first received by investors until they recoup their initial contributions and the agreed minimum profit followed by catch up for the GP and then finally the agreed Split For example, 80% 20% on any remaining profits this is done in order to ensure that the LPS in a fun first receive a minimum return before allowing the PE firm managers also to be compensated for Superior return performance.

Importantly so that all stakeholders are aligned management teams of portfolio companies also share in profits through Equity schemes referred to as management incentive programs.