What Is AUM in Private Equity & How Is It Calculated?

Assets Under Management (AUM) is a fundamental metric in the financial industry, representing the total market value of all financial assets managed by an investment firm or professional on behalf of clients. AUM provides a general indication of a firm’s scale and influence in the broader financial landscape.

Understanding Assets Under Management

Assets Under Management (AUM) is a dynamic figure that fluctuates continuously due to market performance, new investments, and client withdrawals. In traditional asset management, AUM is calculated based on the current market value of securities held, including stocks, bonds, mutual funds, exchange-traded funds, and cash equivalents.

A large AUM often suggests an investment firm has attracted significant capital, indicating a track record of success or investor confidence. Firms with higher AUM may also possess greater liquidity, making it easier to manage inflows and outflows without significantly impacting investment strategies. A larger AUM generally translates into higher revenue through management fees. While the general concept of AUM applies across various financial sectors, its specific interpretation and calculation in private equity have unique characteristics.

Components of AUM in Private Equity

Within the private equity context, Assets Under Management (AUM) encompasses specific elements that reflect the distinct nature of illiquid investments. Unlike traditional public markets where assets are readily valued, private equity AUM calculations can be more complex and less standardized. The components often include committed capital, invested capital, unrealized value, realized value, and cash holdings.

Committed capital refers to the total amount of money investors have pledged to a private equity fund over its lifespan. This capital is not immediately invested but is drawn down through “capital calls” as the fund identifies investment opportunities. Committed capital often forms the basis for AUM calculations, particularly for “gross AUM” or for management fee calculations during the initial years of a fund. Invested capital is the portion of committed capital that has been drawn down and deployed into portfolio companies.

Unrealized value accounts for the current estimated value of investments still held by the fund. Since private equity assets are not publicly traded, their valuation relies on methodologies such as mark-to-market or mark-to-model. These valuations are estimates and can be less precise than market prices for public securities. Realized value represents the proceeds from investments that have been successfully exited, meaning the portfolio company has been sold or has undergone a liquidity event. After distribution to investors, realized value typically no longer contributes to the fund’s AUM.

Private equity funds also hold cash and other liquid assets, which are included in their AUM. This cash may be reserved for future investments, operational expenses, or distributions.

The definition of AUM can vary among private equity firms. For instance, “gross AUM” might include all committed capital, whether drawn or undrawn, providing a broad measure of the fund’s potential investment capacity. Conversely, “fee-paying AUM” is the specific portion of AUM on which management fees are calculated. This base often changes over the fund’s lifecycle, sometimes shifting from committed capital to invested capital or net asset value as the fund matures. The lack of uniform standards means that comparing AUM figures directly between different private equity firms requires an understanding of their specific calculation methodologies.

The Role of AUM in Private Equity

Assets Under Management (AUM) serves as the basis for calculating management fees charged by private equity firms, known as General Partners (GPs), to their investors, the Limited Partners (LPs). These management fees are annual charges designed to cover the operational expenses of the fund, including salaries, due diligence costs, and administrative overhead.

The fee basis for private equity funds typically evolves throughout the fund’s life cycle. During the initial “investment period,” which commonly spans three to five years, management fees are often calculated as a percentage of the committed capital. This ensures the GP receives a stable income stream to build the portfolio. After the investment period, as capital is fully invested and the focus shifts to managing existing assets and seeking exits, the fee basis may “step down” and be calculated on invested capital, the cost basis of remaining assets, or the net asset value of the fund. Management fees generally range from 1.5% to 2% annually, though larger funds might negotiate lower percentages due to economies of scale.

A higher AUM signals a firm’s ability to raise substantial capital from institutional investors, which can enhance its reputation and attractiveness. This scale can also provide access to a broader range of investment opportunities and potentially larger deal flow. Firms with significant AUM often appear in industry rankings, which can further attract new investors and reinforce their market presence.

Investors often consider AUM during their due diligence process, viewing it as an indicator of a firm’s experience and stability. While a large AUM does not guarantee performance, it suggests a firm has a robust infrastructure and a proven ability to manage substantial capital. However, excessive AUM can sometimes make it challenging for a fund to deploy capital effectively or achieve outsized returns, particularly in niche strategies.