How We Get Paid
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.
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.
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
50.00% = owner-manager of the
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
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.