Pawson Case Harvard Business Review

Memoranda:

Pawson Foundation

To: Mr. Martin Smith, Vice President

Pawson Foundation

Dear Mr. Smith,

Although we share your concerns regarding Mayfield’s recent fund performance and its exorbitant management fees, Mayfield has proven talent of identifying investment opportunities and has produced substantial profitable returns in all their funds. We recommend that the Pawson Foundation participate in Mayfield XII because Mayfield delivered on average over 250% return on capital from Fund VIII and IX to our Foundation.

Analysis

As Daniel Primack expressed in his article, “Mayfield Takes LP Lumps” in August 12, 2005’s Private Equity Week Wire, Mayfield charged the LP’s the difference between what the LP’s had paid in the management fees in Mayfield fund VIII and IX and the 2.5% maximum that could have been charged. We calculated Mayfield’s budget based on the provided assumptions and allocated the budget-fees across the funds in proportion to their size.

In Exhibit #1, we calculated the budget-based management fees paid by the LP’s and the nominal value of the fees underpaid. For Fund VIII and IX, Mayfield collected additional of $68.5 million in unpaid fees. Although many LP’s expressed frustration and disappointment with the way Mayfield handled the fee/clawback issues, the total net payout was outstanding to the LP’s (almost 400% ROC for IX).

Mayfield Funds | Vintage | Committed Capital (MM) | Current Fund Size (MM) | LP Payout (+Cost) | Mgmt Fees Paid | Collect Unpaid Fee (2.5%Max) | LP'sNet $Payout |

Mayfield VIII | 1995 | $185 | $530.40 | $450.84 | ($19.45) | ($31.43) | $399.96 |

Mayfield IX | 1997 | $252 | $1,527.62 | $1,298.48 | ($19.65) | ($37.05) | $1,241.78 |

Evaluation of Recent Fund Performance

Evaluating the performance of Private Equity firms is difficult because there is no true comparable benchmark. The IPO’s of portfolio companies such as Amgen and SanDisk were exclusively in the Mayfield funds and...