Answer: committed capital.

## Explanation Private equity funds typically charge management fees based on **committed capital** rather than invested capital or assets under management. Here's why: ### Key Concepts: 1. **Committed Capital**: This is the total amount of capital that investors (limited partners) have agreed to contribute to the fund over its lifetime. It represents the fund's total size. 2. **Invested Capital**: This is the portion of committed capital that has actually been deployed into investments. In private equity, capital is called down gradually as investment opportunities arise. 3. **Assets Under Management (AUM)**: Typically used in mutual funds and hedge funds, this represents the current market value of all assets managed. ### Why Committed Capital is Used: - **Predictable Revenue Stream**: Management fees based on committed capital provide a stable, predictable income for the fund manager (general partner) to cover operational expenses. - **Alignment with Fund Lifecycle**: Private equity funds have a typical lifecycle of 10+ years, with capital being called down over time. Using committed capital ensures the manager has resources throughout the fund's life. - **Industry Standard**: This is the standard practice in the private equity industry, distinguishing it from other investment vehicles. ### Comparison with Other Options: - **Option A (Invested Capital)**: Would result in fluctuating fees as capital is deployed and investments are exited, creating uncertainty for the manager. - **Option C (Assets Under Management)**: More common in mutual funds and hedge funds where assets are liquid and can be valued regularly. Private equity investments are illiquid and hard to value accurately until exit. Therefore, **committed capital** is the correct basis for private equity management fees.

Author: LeetQuiz .