A line-by-line fundraising budget, with the organisational expenses cap and the placement fee offset applied to show who really pays.
Add the placement agent's fee, fund formation costs, the investor relations team's time, travel, materials and registrations for the months the raise takes. On an illustrative 500 million fund raised over 18 months with 40 per cent of commitments placed by an agent, the total is 7.50 million, or 1.50 per cent of commitments. The fund bears 1.00 million under its organisational expenses cap; the GP bears 6.50 million, about 7.8 months of its management fee.
Worked in full in Private Equity Investor Relations by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Fundraising cost is spread across several budgets. The placement fee sits in the LPA's fee offset clause, legal costs sit partly in the fund and partly with the manager, and the investor relations team's salaries are just overhead. Nobody adds them up until a partner asks whether the next fund is worth raising at the current size, or whether the agent is earning its fee. The sum is straightforward, and what matters most is the second line: who ends up paying.
| Input | Value |
|---|---|
| Fund size (commitments) | 500 |
| Time from launch to final close | 18 months |
| Commitments introduced by the placement agent | 40% (200) |
| Placement fee on agent-introduced commitments | 2.0% |
| Fund formation legal and organisational costs | 1.5 |
| Organisational expenses the LPA lets the fund bear (cap) | 1.0 |
| Investor relations and fundraising staff, fully loaded, a year | 0.9 |
| Travel and roadshow, whole raise | 0.4 |
| Data room, DDQ, deck, operational due diligence preparation | 0.15 |
| Marketing registrations | 0.1 |
| Management fee: 2.0% of commitments for 5 years, then 1.5% of 400 invested for 5 |
Step 1: the placement fee. 500 × 40% = 200 of agent-introduced commitments, at 2.0 per cent: 4.00 million.
Step 2: the time-based costs. The IR team at 0.9 a year for 18 months is 0.9 × 18 ÷ 12 = 1.35. Travel for the raise is 0.40.
Step 3: the fixed costs. Legal 1.50, materials 0.15, registrations 0.10.
Total = placement + legal + IR team × months ÷ 12 + travel + materials + registrations
= 4.00 + 1.50 + 1.35 + 0.40 + 0.15 + 0.10 = 7.50, or 1.50% of 500 (150 basis points)
In Excel: =B1*B3*B4+B5+B7*B2/12+B8+B9+B10
| Item | Amount | Share of total | % of fund |
|---|---|---|---|
| Placement fee | 4.00 | 53.3% | 0.80% |
| Legal and formation | 1.50 | 20.0% | 0.30% |
| IR team time | 1.35 | 18.0% | 0.27% |
| Travel | 0.40 | 5.3% | 0.08% |
| Materials | 0.15 | 2.0% | 0.03% |
| Registrations | 0.10 | 1.3% | 0.02% |
| Total | 7.50 | 1.50% |
The fund bears legal costs up to its 1.00 cap. The 0.50 above the cap falls to the GP. The placement fee is either paid by the manager directly or paid by the fund and offset against the management fee, often in full; either way the GP bears it economically. Staff, travel, materials and registrations are management company costs. The GP's share is therefore 6.50 million, 86.7 per cent of the total.
Against a 10.00 million annual management fee, that is 0.65 years, or 7.8 months, of fee income spent before the first deal. Over the fund's life the fees total 80.00 million (50 in the investment period, 30 after), so the raise consumes 8.1 per cent of them.
The cost per unit of capital differs by source. Agent-introduced money costs 2.00 per 100 raised. The 300 the team raises itself costs 3.50 of non-agent costs, or 1.17 per 100, although some of that spending also supports the agent's investors.
| Fund size | Months | Agent share | Total cost | % of fund | Borne by GP |
|---|---|---|---|---|---|
| 250 | 18 | 40% | 5.50 | 2.20% | 4.50 |
| 500 | 12 | 40% | 6.92 | 1.38% | 5.92 |
| 500 | 18 | 0% | 3.50 | 0.70% | 2.50 |
| 500 | 18 | 70% | 10.50 | 2.10% | 9.50 |
| 500 | 30 | 40% | 8.67 | 1.73% | 7.67 |
| 1,000 | 18 | 40% | 11.50 | 1.15% | 10.50 |
Three patterns stand out. Fixed costs make small funds expensive: halving the fund to 250 raises the cost from 1.50 to 2.20 per cent. The agent's share is the biggest single lever, moving the total from 3.50 to 10.50. Time costs less than people expect in direct spending, 8.67 for a 30-month raise against 6.92 for 12 months, but the real cost of a slow raise is the fee income that starts later and the deals that pass while the team is on the road.
Quoting only the placement fee as “the cost of raising”. In this case it is 4.00 of 7.50; the other 3.50 is real money even when no agent is used. The opposite mistake is to treat the fund as the payer because the invoices go to it: once the organisational expenses cap and the fee offset are applied, the manager carries 6.50 of the 7.50. Model the LPA's cap and offset before deciding what a fundraise costs the firm.
Fee offset percentages, organisational expense caps and placement fee terms vary from fund to fund and are negotiated. The figures here are illustrative; use your own LPA terms.
A 500 million raise costs about 1.50 per cent of commitments on these assumptions, and most of it lands on the GP: 7.8 months of management fee. Build the budget line by line, apply the cap and the offset, and test fund size and agent share before launching. The free companion workbook covers the fund numbers LPs will ask about once the raise begins. For the agent decision, see whether a 2 per cent placement agent fee is worth paying, and for the timetable behind the months, how long it takes to raise a private equity fund.
Either the manager pays the agent directly, or the fund pays and the LPA offsets the fee against the management fee, often in full, so in both cases the GP bears the cost economically. In the worked 500 million fund, 2.0 per cent on 200 million of agent-introduced commitments is 4.00 million, more than half of the 7.50 million total cost of the raise.
They are the costs of forming the fund, mainly legal, that the LPA allows the fund to bear up to a cap. Costs above the cap fall to the manager, typically through a reduction in the management fee. With 1.5 million of formation costs and a 1.0 million cap, the GP absorbs 0.50 million.
Yes, because legal, materials and team costs do not scale with size. On the same assumptions a 250 million fund costs 5.50 million to raise, 2.20 per cent of commitments, while a 1,000 million fund costs 11.50 million, 1.15 per cent.
This article is one calculation from Private Equity Investor Relations. 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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