Rebuild the fees fund by fund, net the offsets, leave the carry out, and watch what a single step-down does to the management company.
Fee-related earnings (FRE) are a manager's management fees and other fee revenue, net of the offsets it owes its funds, less the cash compensation and overheads that run the business, with carried interest and its payouts left out. On an illustrative manager with 1,140 million of fee-paying assets, 17.475 million of fee revenue less 13.000 million of costs gives FRE of 4.475 million, a 25.6 per cent margin. Ignore the transaction-fee offset and the same business appears to earn 6.475 million.
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 →
FRE is the number that tells a GP whether the management company stands on its own: whether salaries, rent and systems are paid by recurring fees or by hoping for carry. It is also the number a stake buyer, a lender to the management company or a successor partner will rebuild from the fee schedules. For a COO it is a planning tool. Fee bases step down, funds run off and the next fund lands late, and FRE moves far more than revenue when they do.
| Fee stream | Fee base | Base | Rate | Fee |
|---|---|---|---|---|
| Fund I, post investment period | Net invested capital | 240 | 1.50% | 3.600 |
| Fund II, investment period | Commitments | 750 | 1.75% | 13.125 |
| Co-investment mandate | Invested capital | 150 | 0.50% | 0.750 |
| Gross management fees | 1,140 | 1.53% | 17.475 |
Portfolio companies paid 2.000 million of transaction and monitoring fees to the manager, offset 100 per cent against Fund II's management fee. Cash compensation and benefits, bonuses included but carry excluded, are 9.600 million; general and administrative costs (rent, systems, travel, insurance, professional fees the manager bears) are 3.400 million.
Fee revenue = management fees − fee offsets + transaction and monitoring fees + other recurring fees
FRE = fee revenue − cash compensation (excluding carry and equity awards) − G&A
FRE margin = FRE ÷ fee revenue
In Excel, with fee lines in B2:B4, transaction fees in B5, the offset percentage in B6 and costs in B8:B9: =SUM(B2:B4)-B5*B6+B5-SUM(B8:B9). Keep each fund's fee on its own row with its own base: a single blended rate hides the step-downs that drive the forecast.
| Line | Amount |
|---|---|
| Gross management fees | 17.475 |
| Less offset of transaction and monitoring fees | -2.000 |
| Net management fees | 15.475 |
| Transaction and monitoring fees | 2.000 |
| Fee revenue | 17.475 |
| Cash compensation and benefits | -9.600 |
| General and administrative | -3.400 |
| Fee-related earnings | 4.475 |
| FRE margin | 25.6% |
The manager earns 4.475 million of FRE, 25.6 per cent of fee revenue and 39.3 basis points of fee-paying assets. Its costs are 114.0 basis points of the same assets against an effective fee rate of 1.53 per cent: most of the fee is spent running the platform. With a full offset, the transaction fees add nothing: what portfolio companies pay the manager, the fund recovers through a lower management fee. Counting them as revenue without the offset shows FRE of 6.475 million and a 33.2 per cent margin, which is wrong by the full 2.000 million.
FRE is not a statutory figure. Listed managers each define it, and definitions differ on equity-based compensation, placement fees and fee-earning versus fee-paying assets. For an internal plan, write the definition down once and keep it.
The cost base is largely fixed in the short run. Revenue is not: Fund II's investment period ends and its fee steps down to 1.50 per cent on 600 million invested, Fund I's base halves to 120 million as it sells, and a Fund III of 1,200 million at 1.75 per cent may or may not close, bringing 4.000 million of new cost with it.
| Scenario | Fee revenue | Costs | FRE | Margin |
|---|---|---|---|---|
| Today | 17.475 | 13.000 | 4.475 | 25.6% |
| Fund II steps down, no Fund III | 13.350 | 13.000 | 0.350 | 2.6% |
| Fund II steps down, Fund I runs off | 11.550 | 13.000 | -1.450 | -12.6% |
| Fund II steps down, Fund III of 1,200 closes with 4.000 of new cost | 34.350 | 17.000 | 17.350 | 50.5% |
A step-down alone takes 4.125 million of the 4.475 million of FRE, because Fund II's fee falls from 13.125 to 9.000 million while every salary stays. Add Fund I's run-off and the management company loses money. Fund III reverses everything: 21.000 million of new fee against 4.000 million of new cost, an incremental margin of 81.0 per cent. That operating leverage is why the gap between funds is the most dangerous period for a manager, and why the timing of the next close matters more to FRE than any cost saving. How long a manager can last if that close never comes is worked in how long a GP can survive without a new fund.
Rebuild fee revenue fund by fund, net the offsets, deduct cash compensation and overheads, and leave carry out: 4.475 million of FRE and a 25.6 per cent margin here, falling to 0.350 million after one step-down and rising to 17.350 million with the next fund. The free workbooks for this case include the management fee model with its step-down, side-letter rate and offset, the inputs from which any FRE forecast starts.
It depends mostly on scale and where the funds sit in their life, so compare a manager with its own plan rather than with a benchmark. On the illustrative manager, the margin is 25.6 per cent today, 2.6 per cent once the main fund steps down without a successor, and 50.5 per cent once a 1,200 million successor fund closes, because costs are largely fixed.
Yes, but net of whatever share is offset against the management fee. With 2.000 million of transaction and monitoring fees offset 100 per cent, the illustrative manager's fee revenue stays at 17.475 million. Counting the fees without the offset overstates FRE at 6.475 million instead of 4.475 million.
No. FRE measures the recurring fee business, so carried interest, and the compensation paid out of it, are excluded. Cash salaries and bonuses funded from management fees are included. Including carry would make FRE depend on exits, which defeats its purpose as a measure of whether fees alone cover the platform's 13.000 million of illustrative costs.
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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