A single-deal SPV often has no annual management fee, but its fixed and one-off costs come off the top and its carry has no losers to net against.
More than the headline 20 per cent. On an illustrative 2,000,000 single-company SPV with set-up costs, a one-off 5 per cent management fee, seven years of administration and 20 per cent carry, a company that returns 3.0x gives the SPV's investors 2.42x, a 13.5 per cent IRR against 17.0 per cent gross. Measured against investing directly, the SPV takes 28.8 per cent of the gain, because every unit of cost taken at closing also forgoes the company’s 3.0x, and the carry then takes a fifth of the profit that is left.
Worked in full in Venture Capital by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Special purpose vehicles have become the standard way for angels, scouts and emerging managers to pool money into one startup. The investor sees "no management fee, 20 per cent carry" and compares it with a fund's 2 and 20. The fair comparison is a calculation, and it needs every line of the SPV's cost, not only the carry.
| Input | Value |
|---|---|
| SPV size, all investors | 2,000,000 |
| One investor's ticket | 100,000 |
| Set-up, legal and platform costs | 12,000 |
| One-off management fee, 5% of commitments | 100,000 |
| Administration, tax filings and audit: 5,000 a year, reserved at closing for seven years | 35,000 |
| Carried interest to the lead, no hurdle | 20% |
| Company outcome on the money invested, after seven years | 3.0x |
Costs taken at closing = 12,000 + 100,000 + 35,000 = 147,000, 7.3% of the money raised
Invested in the company = 2,000,000 − 147,000 = 1,853,000, 92.7% of commitments
Proceeds at exit = 1,853,000 × 3.0 = 5,559,000
Profit over commitments = 5,559,000 − 2,000,000 = 3,559,000; carry = 20% × 3,559,000 = 711,800
Paid to investors = 5,559,000 − 711,800 = 4,847,200; net multiple = 4,847,200 ÷ 2,000,000 = 2.42x
Net IRR = 2.421/7 − 1 = 13.5%, against 3.01/7 − 1 = 17.0% gross
In Excel: =((Size-Fees)*Gross-Carry*MAX((Size-Fees)*Gross-Size,0))/Size
| Line | Amount |
|---|---|
| Investing directly at 3.0x | 300,000 |
| Less: 7,350 of costs that were never invested, times 3.0 | −22,050 |
| Less: share of the carry | −35,590 |
| Received through the SPV | 242,360 |
The costs matter more than their size suggests because they are multiplied: every euro or dollar spent at closing is one that never compounds at 3.0x. The 7,350 of this investor's costs cost it 22,050 of proceeds. The carry is then levied on a profit that the costs have already shrunk, so the carry takes slightly less than 20 per cent of the direct gain, 17.8 per cent, while the costs take 11.0 per cent of it; together they take 28.8 per cent of the gain.
| Company multiple | Net multiple to investors | Share of gross multiple kept | Carry paid |
|---|---|---|---|
| 0.5x | 0.46x | 92.7% | 0 |
| 1.0x | 0.93x | 92.7% | 0 |
| 1.5x | 1.31x | 87.5% | 155,900 |
| 3.0x | 2.42x | 80.8% | 711,800 |
| 5.0x | 3.91x | 78.1% | 1,453,000 |
| 10.0x | 7.61x | 76.1% | 3,306,000 |
| SPV size | Costs at closing | Share of capital | Net multiple at 3.0x | Net IRR |
|---|---|---|---|---|
| 500,000 | 72,000 | 14.4% | 2.25x | 12.3% |
| 1,000,000 | 97,000 | 9.7% | 2.37x | 13.1% |
| 2,000,000 | 147,000 | 7.3% | 2.42x | 13.5% |
| 5,000,000 | 297,000 | 5.9% | 2.46x | 13.7% |
Two levers sit with the investor. Dropping the one-off management fee lifts the 2,000,000 SPV from 2.42x to 2.54x, a 14.3 per cent IRR; cutting the carry to 10 per cent lifts it to 2.60x. A small SPV is the expensive case: at 500,000, more than a seventh of the capital never reaches the company.
Before signing, read how the carry base is defined. The calculation above charges carry on proceeds above the 2,000,000 committed, so the costs are returned before the lead shares in anything. Some documents charge it on proceeds above the 1,853,000 actually invested instead: the carried profit becomes 3,706,000, the carry 741,200, 29,400 more, and the fees are in effect carried as if they were gains. Ask too whether the administration reserve is capped and whether any unused balance comes back to investors.
Comparing an SPV's 20 per cent carry with a fund's 20 per cent as if they were the same price. A fund charges carry on the net result of its whole portfolio, after the write-offs, as worked in what gross multiple a VC fund needs to return 3x net. An investor who builds a portfolio out of SPVs pays 20 per cent on every winner and gets nothing back on the losers, plus a full set of fixed costs per company. Ten 100,000 SPV tickets are ten sets of set-up and administration, not one.
The second mistake is reading the net multiple without the holding period. 2.42x sounds close to 3.0x; over seven years it is 13.5 per cent a year against 17.0, a gap of 3.5 points, as the conversion in how to convert MOIC to IRR shows.
Add every cost taken at closing, invest what is left at the company's multiple, charge the carry on the profit over commitments, and divide by commitments. On the illustrative terms a 3.0x company becomes 2.42x, and the SPV keeps 28.8 per cent of the gain rather than 20. Size and the one-off fee move the answer most. The book's fund economics, with the fee schedule, the investable capital and the carry conventions, are in the free workbook for this case.
Typically a set-up or platform charge, annual administration, audit and tax filing costs, sometimes a one-off management fee, and carried interest to the lead, often 20 per cent of the profit. In the illustrative 2,000,000 SPV the fixed costs and a 5 per cent one-off fee total 147,000, 7.3 per cent of the money raised, before any carry.
It is charged on one deal, so it is never reduced by losses elsewhere. An investor in ten SPVs pays carry on every winner and gets nothing back on the write-offs, while a fund nets them first. In the illustrative case 20 per cent carry plus the costs leave the investor 2.42x on a 3.0x company, an effective take of 28.8 per cent of the gain.
There is no rule, but fixed costs decide it. In the illustrative terms, a 500,000 SPV spends 14.4 per cent of its capital on fees and returns 2.25x on a 3.0x company, against 2.46x for a 5,000,000 SPV that spends 5.9 per cent.
This article is one calculation from Venture Capital. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: private equity and private markets → · All 1682 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.