An analysis of HBS case Acme Trust (Private Equity finance).

1. Why is Warburg, Pincus proposing a different requital structure from the sample arrangement?

A five forces analysis of the Private Equity fabrication reveals that Warburg is shifting its fee structure to take advantage of modified customer bar solveing power from its customers while trying to pay its access to increasingly scarce investment opportunities and deny it to its rivals by dint of a price-war.

Warburg, Pincus is proposing to shift its fee structure by big(a) its carried interest from 20 to 15% of any capital gain while rising its way fee from 1 to 1.5% of connected capital. Meanwhile, it aims at raise a record-breaking $ 2 billions mega-fund.

One account is that Warburg is opting for a subaltern price / high volume fundraising strategy. However, this does non hold since Warburg would be better off (except when assuming a low 5% annual return on investment) raising a fund similar to its 1989 one in both size and fee structure.

More convincingly, Warburg may be on the look-out for a price war. Indeed, both its management fee and carried interest atomic number 18 now in the lower end of market range. The public carried interest is overwhelmingly at 20%. The median management fee is 2% for large funds (see exhibit 6) and 2.5% for smaller ones. Interestingly Warburg has now aligned its price structure at least 25% below the market average disregardless of the expected return on invested funds.



The increase of its management fee may only signal that it was historically abnormally low compared to market averages.

Another possible explanation is that Warburg is addressing the agency problem mingled with general and limited partners. The case provides evidence that it exists some feast between the announced returns of Private Equitys funds and the actual returns change in by limited partners. Warburg may recognize it...

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