Direct Private Equity Investment Process
Target Investment Description
Portfolio Strategy
How We Get Paid
Case Studies
Need more info about:
Value Investments
Value Creation Consulting?

Call (210) 828-3722



How We Get Paid

Exclusive "Buy-Side" Representation for Investor Clients

In exchange for exclusive representation and full-time vigilance in managing the direct private equity investments, Balance Ventures' investors pay Balance Ventures a management fee, which is a percentage of the total funds invested on their behalf. This is similar to management fees paid by limited partners to the managers of their blind-pool venture capital funds, by mutual fund unit holders to their fund managers, and by hedge fund investors to their fund managers.

Investor clients also allocate to Balance Ventures a "back-end interest" or "carried interest" in direct private equity investments which we execute on their behalf. This back-end interest is best described as a deferred equity stake in the portfolio company that is contingent upon "pay-back," or the return of all of the investor client's capital used to fund the original investment. Below are examples to illustrate these management fees and back-end interests.

Management Fees

Let's say that a single investor client placed $10 million with Balance Ventures for direct private equity investments. Balance Ventures would earn a percentage of that total as an annual management fee. Let's say for the sake of example that this management fee is 2.5%, which is a market rate typical of many venture capital firms. Balance Ventures would collect $250,000 per year, or 2.5% of the $10 million invested. Balance Ventures uses this management fee to cover the firm's basic operating expenses, including rent and office expenses and salaries.

Back-End Interest

Let's say, hypothetically, that Balance Ventures invested this client's $10 million, plus $10,000 of Balance Ventures' own money, for a total of $10,010,000, in a single company for a 50% combined ownership stake (50% of the entire company, with the remaining 50% held by the owner-manager of that company). Ownership at the date of investment is:

50.00% = owner-manager of the target company
49.90% = investor
00.10% = Balance Ventures
100.00% = total ownership

Over the course of five years, the company distributes cash flows (dividends) to Balance Ventures' investor client sufficient to return her entire $10 million of original capital. At that point where the investment reaches "pay-back" (return of the investor's original capital), then Balance Ventures' equity stake in the investment (not the stake in the entire company) increases from 0.10% to somewhere between 20% and 25%. The actual percentage may be different, but let's assume 25%.

Balance Ventures' investor client now owns 75% of the 50% combined ownership stake, or 37.5% of the entire company, and Balance Ventures now owns 25% of the 50% combined ownership stake, or 12.5%, of the entire company. The owner/manager's stake remains at his original 50%. Prior to pay-back, Balance Ventures receives nothing for its back-end interest - and in fact, the back-end interest has no value - again, prior to pay-back. But as a result of this back-end interest, Balance Ventures receives, after pay-back, 12.5% of any dividend distributions from the company and 12.5% of any capital gains resulting from the sale or recapitalization of the company. The investor client still retains 37.5% of all distributions, capital gains, if any, and the value of the business.

Lower Management Fees and Back-End Interest Reduce Overall Investment Risk for Investors

Balance Ventures would rather stay in for the long term alongside its investors and accept lower management fees up front in exchange for a larger back-end interest later. This back-end interest incentive compensation mechanism mitigates the investor's risk associated with the investment because it ties Balance Ventures' financial gains directly to the investor clients and their own returns. This performance-based incentive means that Balance Ventures' is motivated to identify, execute, manage and harvest direct private equity investments that will (a) return initial capital to investors ("pay-back"), and (b) provide sufficient sustainable cash flow so that both the investors and Balance Ventures earn a significant return after pay-back.

Because management fees are not the major component of Balance Ventures' compensation, the firm is motivated to perform - to generate superior returns - rather than to grow its asset base (aka, "money under management") as the end goal. This further mitigates risk for our investor clients, because Balance Ventures remains focused on finding and executing investments for their excess capital and is less distracted with recruiting new investors and assets to the firm.

Balance Ventures Invests Its Own Capital With Its Investor Clients

It is also important to note that Balance Ventures invests its own cash alongside its investors. This further locks our interests in with those of our clients. We believe that we can recoup investors' capital and generate superior returns, so we co-invest a portion of our own wealth in the deals we execute.

Value Creation Consulting - Assistance for Entrepreneurs

On occasion, we will assist an entrepreneur with a business issue at his or her company without investing equity capital from our investor clients to grow the entrepreneur's business. We may revamp the back office and establish financial and reporting procedures and controls. Or we may help set strategy, strengthen management team personnel, refinance debt or find lease financing, or manage growth and the operational and financial challenges that result.

In such a case, the management fees and back-end interests described above are not applicable. For this value creation consulting with an entrepreneur or company, we generally work under a fee-based, project-specific arrangement, the terms of which are negotiable and depend on the level and length of time the entrepreneur or company needs our help.