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?

 Calculate the NPV for OPERF given a 1.5% management fee. (20pts) 

 Calculate the NPV for OPERF given a 1.35% management fee. (20pts)

Compare OPFER's expected gains from this reduction in management fees. (10pts)

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%

 Calculate the NPV for OPERF given a hurdle rate of 8% and a 1.35% management fee. (20pts) 

 Calculate the NPV for OPERF given a carry of 15% and a 1.35% management fee. (20pts)

Which option your firm would recommend to OPERF's? (10pts)