One quarter's management fee with a step-down, a side-letter rate, an offset and one investor's waiver, done right and done the way a top-level reconciliation cannot catch.
A side-letter fee waiver is applied to the waived investor's own gross fee, computed on the unmodified base, before offsets are shared and net fees struck. In an illustrative quarter with 666,180.81 of gross fee, a 50 per cent waiver for one family office and 180,000 of offsets, the invoice is 462,834.23. Entered instead as a fund-level adjustment, the invoice is still 462,834.23, but the family office underpays 1,636.38 and five other investors pay it for them.
Worked in full in The Private Markets COO by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The error this article prices is one an administrator can make on a perfectly ordinary quarter, and the top-level reconciliation will pass it. The fix is a fixed order, applied investor by investor, with one control at the end.
1. Gross fee per investor on the unmodified base: commitments × rate × days before the step-down / 365 + net invested capital × rate × days after / 365
2. Waiver = the investor's own gross fee × its waiver percentage
3. Offset share = total offset × investor's gross / total gross (as this fund's agreement provides)
4. Net fee = gross − waiver − offset share
Control: Σ net fees + Σ waivers + offsets = Σ gross on the unmodified base
A fictional Fund III, third quarter. The commitment-based fee ends on 15 August, splitting the 92-day quarter into 46 days at 1.75 per cent on commitments and 46 days at 1.50 per cent on net invested capital. One sovereign investor has a side-letter rate of 1.50 per cent and 1.25 per cent; the family office has a 50 per cent waiver; the general partner pays no fee. Transaction fees of 180,000 received by the manager are offset 100 per cent.
| Investor | Gross fee | Share of gross | Waiver | Offset share | Net fee |
|---|---|---|---|---|---|
| Harlow State Pension Plan | 186,772.60 | 28.04% | 0.00 | 50,465.37 | 136,307.23 |
| Meridian Mutual Insurance | 140,079.45 | 21.03% | 0.00 | 37,849.04 | 102,230.41 |
| Kestrel Sovereign (side-letter rate) | 105,863.01 | 15.89% | 0.00 | 28,603.86 | 77,259.15 |
| Calloway University Endowment | 77,821.92 | 11.68% | 0.00 | 21,027.24 | 56,794.68 |
| Aster Family Office (50% waiver) | 46,693.15 | 7.01% | 23,346.58 | 12,616.35 | 10,730.22 |
| Norrland Fund of Funds IV | 108,950.68 | 16.35% | 0.00 | 29,438.14 | 79,512.54 |
| Fund (GP pays no fee) | 666,180.81 | 100% | 23,346.58 | 180,000.00 | 462,834.23 |
Step 1, gross fee. For Harlow: 60,000,000 × 1.75% × 46 / 365 = 132,328.77 on commitments, plus 28,800,000 × 1.50% × 46 / 365 = 54,443.84 on invested capital, 186,772.60. Across the fund, 472,602.74 + 193,578.08 = 666,180.81.
Step 2, the waiver, on Aster's own gross. 46,693.15 × 50% = 23,346.58. Nobody else's fee moves.
Step 3, the offset. 180,000 shared by share of gross fee; Aster's 7.01 per cent is 12,616.35. The residual cent from rounding goes to the largest holder.
Step 4, net fee. Aster: 46,693.15 − 23,346.58 − 12,616.35 = 10,730.22. The invoice is 666,180.81 − 23,346.58 − 180,000 = 462,834.23, and the control holds: 462,834.23 + 23,346.58 + 180,000 = 666,180.81.
Suppose the administrator books the waiver as a fund-level adjustment. It reduces the fund total to 462,834.23 and spreads that total across all investors by share of gross: Aster's spread is 32,440.42, which already carries 7.01 per cent of its own waiver. Then the waiver on Aster's investor record applies again, taking it to 9,093.84. To keep the invoice at the agreed total, the 23,346.58 removed twice is redistributed to the investors without a waiver.
| Investor | Charged as processed | Correct net fee | Over (under) charge |
|---|---|---|---|
| Harlow State Pension Plan | 136,800.58 | 136,307.23 | 493.35 |
| Meridian Mutual Insurance | 102,600.43 | 102,230.41 | 370.02 |
| Kestrel Sovereign | 77,538.79 | 77,259.15 | 279.64 |
| Calloway University Endowment | 57,000.25 | 56,794.68 | 205.57 |
| Aster Family Office | 9,093.84 | 10,730.22 | -1,636.38 |
| Norrland Fund of Funds IV | 79,800.34 | 79,512.54 | 287.80 |
| Fund | 462,834.23 | 462,834.23 | 0.00 |
The invoice agrees to the management agreement in both versions, so the manager's check passes and the management company is paid the right amount. Aster pays 15.3 per cent less than it owes; the other five pay a little more. The size of the error is exact: the waived investor's share of gross times its own waiver, 7.01% × 23,346.58 = 1,636.38. The control that finds it is the one in the panel: fees plus waivers recorded plus offsets come to 689,527.39 as processed, against 666,180.81 of gross on the unmodified base, a gap of exactly one waiver, 23,346.58.
| Waiver held by | Share of gross | Waiver | Undercharge a quarter | Correct invoice |
|---|---|---|---|---|
| Aster Family Office | 7.01% | 23,346.58 | 1,636.38 | 462,834.23 |
| Kestrel Sovereign | 15.89% | 52,931.51 | 8,411.36 | 433,249.30 |
| Harlow State Pension Plan | 28.04% | 93,386.30 | 26,182.09 | 392,794.51 |
The error grows with the square of size: a larger holder has both a larger waiver and a larger share of it. On the base case it is 6,545.52 a year at this run rate, small enough to survive several quarters unnoticed and large enough to need a refund with interest when it surfaces, as in how to calculate a fee overcharge refund with interest. Every investor's capital account is wrong in the meantime.
Treating an investor-level term as a fund-level number. Waivers, side-letter rates and fee holidays belong on the investor record, and only there; the fund total should be the sum of investor nets, never an input that the investor records are forced to agree to. The same discipline applies to the step-down split itself, worked in how a management fee is calculated when the step-down is mid-quarter.
This case is workbook 3 of the book's four, with the as-processed sheet, the correction by investor and the capital-account rollforward; it is one of the downloads with the free workbook for this case.
A term that reduces one investor's management fee, often by a percentage, for example for a seed or anchor investor or a related party. It applies to that investor only. In the worked quarter a 50 per cent waiver on a family office's 46,693.15 gross fee is 23,346.58, and its net fee after its share of offsets is 10,730.22.
Because the administrator keeps the total right. The waiver is taken off the fund total, spread across all investors, then applied again on the investor's record, and the difference is pushed to the others. The invoice still agrees to the management agreement at 462,834.23; only the split by investor is wrong, by 1,636.38 in the illustration.
The waived investor underpays its share of gross fee times its own waiver, so the error grows with both. With the same 50 per cent waiver held by the largest investor, 28.04 per cent of gross, the undercharge would be 26,182.09 a quarter rather than 1,636.38, paid by the other investors in proportion to their fees.
This article is one calculation from The Private Markets COO. 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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