A management fee facility is repaid from what the management company keeps after paying its people, and that number is a fraction of the fee stream.
A GP can borrow against its management fees only what the fees leave after the management company's own costs can repay, at the lender's coverage ratio, before the fee base steps down. On an illustrative $1,500M fund charging 1.75 per cent, $26.25M of annual fees less $14.0M of costs leaves $12.25M, and at a 1.50x debt service coverage ratio over four years the GP can borrow $26.5M, about one year of gross fees, against $151.25M of fees still to come.
Worked in full in The Fund Finance Professional by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Management fee facilities, along with loans that fund the GP commitment, sit at the manager end of fund finance: the borrower is the management company, not the fund, and the collateral is a contractual fee stream rather than investor commitments or portfolio NAV. GPs often expect to borrow a share of the fees outstanding. Lenders size on cash flow, and the difference is large.
| Input | Value |
|---|---|
| Fund commitments | 1,500 |
| Fee in the investment period (to year 5), on commitments | 1.75% |
| Fee afterwards, on invested capital | 1.25% |
| Management company costs a year (people, rent, systems) | 14.0 |
| Loan rate, fixed for simplicity | 9.00% |
| Minimum debt service coverage ratio | 1.50x |
| Tenor, fully amortising | 4 years |
| Year | Fee base | Fee | Net of costs |
|---|---|---|---|
| 2 to 5, each | 1,500 | 26.250 | 12.250 |
| 6 | 1,200 | 15.000 | 1.000 |
| 7 | 1,000 | 12.500 | −1.500 |
| 8 | 750 | 9.375 | −4.625 |
| 9 | 500 | 6.250 | −7.750 |
| 10 | 250 | 3.125 | −10.875 |
| Total remaining | 151.25 |
Of the $151.25M, $105.00M falls in the investment period and only $46.25M after it, when the fee base switches to invested capital and shrinks as assets are sold. From year seven, without a successor fund, the management company runs at a loss.
Net fee = fee − management company costs (lowest year within the tenor)
Maximum debt service = net fee ÷ DSCR
Maximum loan = maximum debt service × annuity factor (rate, tenor)
In Excel: =PV(Rate,Tenor,-(MinNetFee/DSCR))
Compare the asset-style view a GP might start from. Half of the undiscounted remaining fees is $75.6M. Even discounting the fees at 12 per cent to $102.5M and advancing 50 per cent gives $51.2M. The coverage test allows 52 per cent of that, because it sees the costs that stand between the fee and the lender.
| Management company costs | DSCR 1.25x | DSCR 1.50x | DSCR 1.75x |
|---|---|---|---|
| 12.0 | 36.9 | 30.8 | 26.4 |
| 14.0 | 31.7 | 26.5 | 22.7 |
| 16.0 | 26.6 | 22.1 | 19.0 |
Each $2.0M of extra cost removes about $4.3M of capacity at 1.50x, because costs come off the fee before the coverage ratio divides it. A GP that hires ahead of its next fund borrows less against this one.
Tenor is a harder limit. A three-year loan supports $20.7M. A five-year loan reaches into year six, where net fee is $1.00M, and on level debt service the capacity collapses to $2.6M. The facility has to be repaid inside the investment period, or rely on fees from a successor fund that does not yet exist.
The stress the lender cares about is a fall in fee income with costs unchanged. A 10 per cent fall cuts net fees to $9.63M and coverage on the $26.5M loan to 1.18x; a 20 per cent fall, from fee holidays, offsets or a key-person suspension, takes it to 0.86x.
The common mistake is to size on gross fees. The total of $151.25M, or what the fee earns over the fund's life, is the wrong collateral number: the management company spends most of it on the team that earns it. The second mistake is to assume the investment-period fee runs for the whole tenor; the fee after the investment period is calculated on a smaller base and is often below the cost line. Both mistakes are the manager-level version of a gap that fund finance draws at fund level too: a large eligible number that does not translate into availability.
A third mistake is to ignore what else sits on the fee stream. Fee offsets from transaction and monitoring income, fee discounts to anchor investors and fee waivers converted into GP commitment all reduce the cash that actually reaches the management company, and each one should be deducted before the coverage ratio is applied. Lenders will also ask whether the fund documents allow investors to suspend fees, or remove the manager, after a key-person event, because either turns a contractual fee stream into a contingent one. A GP who models the facility on the fee schedule in the limited partnership agreement, rather than on the fee cash it actually collects, will find the lender's number lower than its own and will not know why.
Size a management fee loan as PV(rate, tenor, minimum net fee ÷ DSCR), with the tenor ending before the step-down. On these illustrative figures that is $26.5M against $151.25M of fees, roughly one year of gross fee income. The free workbooks for this book apply the same order of levers to a subscription line, from eligible commitments to a borrowing base that is not the same thing as availability.
A loan to a fund manager's management company, secured on and repaid from the fees it earns from its funds. It is used for working capital, the GP commitment or growth. In the illustrative case a manager earning $26.25M a year from a $1,500M fund can borrow about $26.5M on a four-year amortising basis at 1.50x coverage.
Because the fee base usually changes from commitments to invested capital after the investment period, and fees fall below the management company's costs. In the worked case fees drop from $26.25M to $15.0M in year six, leaving $1.00M after costs, so a five-year loan sized at 1.50x supports only $2.6M against $26.5M over four years.
Very, because costs are fixed. With $14.0M of costs, a 10 per cent fall in fee income cuts net fees from $12.25M to $9.63M and takes coverage on a $26.5M loan from 1.50x to 1.18x; a 20 per cent fall takes it to 0.86x, below one. Fee holidays, offsets and key-person events all hit this line first.
This article is one calculation from The Fund Finance Professional. 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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