The feeder layer worked on a 1,000,000 commitment: what the placement and servicing fees take in IRR and in multiple, and why the drag is larger than the fees read.
On an illustrative 1,000,000 commitment, a feeder charging a 2.0 per cent placement fee and 0.70 per cent a year on commitment for ten years takes 90,000 and cuts an underlying net IRR of 11.12 per cent to 9.37 per cent: 175 basis points, and 0.15 of a turn of TVPI. That is almost twice the 0.9 per cent a year the fees appear to cost, because they are charged on money that is not yet invested or already returned.
Worked in full in The Private Wealth Fundraiser by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Feeder funds are how many wealth clients reach institutional private equity: the private bank or platform pools many small commitments into one vehicle that invests as a single LP. The feeder makes the minimum reachable and the paperwork bearable. It also adds a layer of fees on top of the fund's own, and the advisor in front of the client needs to state that layer as a return, not as a list of percentages.
| Year | Capital called | Distributions |
|---|---|---|
| 0 | 200,000 | 0 |
| 1 | 250,000 | 0 |
| 2 | 200,000 | 0 |
| 3 | 150,000 | 50,000 |
| 4 | 100,000 | 100,000 |
| 5 | 0 | 200,000 |
| 6 | 0 | 300,000 |
| 7 | 0 | 350,000 |
| 8 | 0 | 300,000 |
| 9 | 0 | 150,000 |
| 10 | 0 | 80,000 |
| Total | 900,000 | 1,530,000 |
Called capital is 90 per cent of commitment. The underlying fund returns 1.70x and 11.12 per cent net to a direct LP. The feeder adds three charges, all on the 1,000,000 commitment: a 2.0 per cent placement fee at subscription, a 0.50 per cent annual servicing fee to the distributor, and 0.20 per cent a year of feeder administration, audit and legal costs, both for years 1 to 10.
Investor cash flowt = −callt + distributiont − placement fee (year 0) − (servicing + admin) × commitment (years 1 to 10)
In Excel: =-B2+C2-IF(A2=0,Placement*Commit,0)-IF(AND(A2>=1,A2<=10),(Servicing+Admin)*Commit,0), then =IRR() on the column. TVPI is distributions divided by calls plus fees.
The placement fee is 20,000 on day one. The annual fees are 7,000 a year for ten years, 70,000. Total feeder fees: 90,000, so the investor pays in 990,000 to receive the same 1,530,000.
| Measure | Direct in the fund | Through the feeder |
|---|---|---|
| Paid in, calls plus fees | 900,000 | 990,000 |
| Distributions | 1,530,000 | 1,530,000 |
| Profit | 630,000 | 540,000 |
| TVPI | 1.70x | 1.55x |
| IRR | 11.12% | 9.37% |
Read as a rate, the headline fees look like 0.70 per cent a year plus a one-off 2.0 per cent, which spread over ten years is about 0.9 per cent a year. The IRR drag is 175 basis points. Three things make up the difference.
Split between the two layers, the placement fee alone costs 57 basis points and the ongoing fees alone 121. Together they cost 175, slightly less than the 178 sum, because IRR drags from separate fee layers do not add exactly.
| Placement fee | Servicing 0.25% | Servicing 0.50% | Servicing 0.75% |
|---|---|---|---|
| 0% | 77 | 121 | 164 |
| 1% | 106 | 148 | 191 |
| 2% | 133 | 175 | 217 |
| 3% | 160 | 201 | 243 |
Each point of placement fee costs about 27 basis points of IRR; each quarter point of annual servicing about 42. On these flows, a distributor offering to waive one point of upfront fee in exchange for a quarter point more trail is offering the investor a worse deal. The grid is the page to put in front of a product committee deciding the feeder's terms, because it converts a negotiation in percentages into the unit the client will actually experience.
Charging on NAV instead of commitment lowers the drag in the early and late years, when NAV is small. It also aligns the distributor's income with the client's money at work. Where a platform can offer it, it is the cleanest single improvement to a feeder's terms.
Model the feeder's fees as cash flows on the fund's own pattern and quote the result as an IRR: here 11.12 per cent becomes 9.37, a cost of 175 basis points. That is the number a client should see before signing and the one a fundraiser should be ready to defend. The free workbooks for this book include the fee stack and total-cost sheet, and the semi-liquid fund fee stack runs the same test on the evergreen alternative.
Typically an upfront placement or subscription fee paid to the distributor, an annual servicing or platform fee, and the feeder's own administration, audit and legal costs, all on top of the underlying fund's management fee and carry. In the illustrative case 2.0 per cent upfront plus 0.70 per cent a year on a 1,000,000 commitment comes to 90,000 over ten years.
Because the fees are charged on the commitment, including capital not yet called and capital already returned, and the upfront fee is paid before any money is invested. On the illustrative fund, headline fees that look like 0.9 per cent a year cost 175 basis points of IRR, and the ongoing fee alone costs 121.
Compare them in IRR, not in percentages. In the illustrative case cutting the placement fee from 2 to 1 per cent saves 27 basis points, while cutting servicing from 0.50 to 0.25 per cent a year saves 42. Over a ten-year fund life, the recurring fee is usually the bigger lever.
This article is one calculation from The Private Wealth Fundraiser. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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