Two bases, two rates and a day count inside one quarter. Get the date or the convention wrong and the invoice is out by six figures.
Split the quarter at the step-down date and charge each part on its own basis, rate and day count: the old rate on commitments up to and including the last day of the investment period, the new rate on net invested capital from the day after. On an illustrative 500 million fund whose investment period ends on 15 May, that is 1,078,767.12 plus 488,356.16, a quarter's fee of 1,567,123.29, against 2,187,500.00 if the old basis is billed for the whole quarter.
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 →
A fictional closed-ended fund with a standard two-basis fee: 1.75 per cent a year on commitments during the investment period, 1.25 per cent on net invested capital afterwards, calculated on actual days over 365 and invoiced quarterly. The investment period ends on 15 May 2026, inside the quarter running from 1 April to 30 June. One investor holds a side letter that takes 0.25 points off both rates.
| Input | Value |
|---|---|
| Commitments | 500,000,000 |
| Net invested capital at the step-down | 310,000,000 |
| Rate during the investment period, on commitments | 1.75% |
| Rate after, on net invested capital | 1.25% |
| Side-letter investor commitment | 50,000,000 |
| Side-letter discount on both rates | 0.25% |
| Days in the quarter, 1 April to 30 June | 91 |
Count the days first, because the date convention is where most errors start. If the investment period ends on 15 May, then 15 May is its last fee day: 1 April to 15 May inclusive is 45 days, 16 May to 30 June is 46. Together they make the quarter's 91.
Pre step-down = 500,000,000 × 1.75% × 45 / 365 = 1,078,767.12
Post step-down = 310,000,000 × 1.25% × 46 / 365 = 488,356.16
Quarter's fee = 1,078,767.12 + 488,356.16 = 1,567,123.29
Excel: =Commit*RateIP*(IPEnd-QStart+1)/365+NIC*RatePost*(QEnd-IPEnd)/365
The two parts are almost the same length but very different in price. Each day before the step-down costs the fund 23,972.60; each day after costs 10,616.44. Moving the step-down date by one day moves the invoice by 13,356.16, which is why the date has to be read from the agreement, not from the fund's marketing summary.
Keep the evidence with the calculation: the clause that defines the end of the investment period, the net invested capital schedule at the step-down date and the day-count wording. An auditor or an investor recomputing the fee will ask for all three, and the quarter of the step-down is the one they pick.
The side-letter investor is then billed on its own record, at its own rates, on its share of each basis: 10 per cent of commitments and, here, 10 per cent of net invested capital, 31,000,000.
| Line | Pre | Post | Total |
|---|---|---|---|
| Side-letter investor at 1.50% and 1.00% | 92,465.75 | 39,068.49 | 131,534.25 |
| Other investors, 90 per cent at headline rates | 1,410,410.96 | ||
| Invoice | 1,541,945.21 |
At headline rates the side-letter investor's share would be 156,712.33. The discount is worth 25,178.08 this quarter, and the invoice sits exactly that amount below the headline fee. That equality is the reconciliation to run every quarter: headline fee, less the sum of the side-letter discounts computed investor by investor, equals the invoice.
The same quarter gives a different number under each convention a fund agreement might use. None is wrong in itself; the error is using a different one from the agreement.
| Convention | Pre | Post | Total | Against act/365 |
|---|---|---|---|---|
| Actual days / 365 | 1,078,767.12 | 488,356.16 | 1,567,123.29 | 0.00 |
| 30/360 (45 and 45 days) | 1,093,750.00 | 484,375.00 | 1,578,125.00 | 11,001.71 |
| Quarterly rate × share of the quarter's days | 1,081,730.77 | 489,697.80 | 1,571,428.57 | 4,305.28 |
| Investment period ends | Days pre | Days post | Fee | Below a quarter of the old annual fee |
|---|---|---|---|---|
| 31 March (before the quarter) | 0 | 91 | 966,095.89 | 1,221,404.11 |
| 30 April | 30 | 61 | 1,366,780.82 | 820,719.18 |
| 15 May | 45 | 46 | 1,567,123.29 | 620,376.71 |
| 31 May | 61 | 30 | 1,780,821.92 | 406,678.08 |
| 30 June (end of the quarter) | 91 | 0 | 2,181,506.85 | 5,993.15 |
The last column is what billing the old basis at a quarter of the annual rate would overcharge. Its last row is worth reading twice: even with no step-down in the quarter, a quarter's fee on actual days is 2,181,506.85, not the 2,187,500.00 of a quarter of the annual rate, because 91 days is less than a quarter of 365. Over a fund's life those few thousand per quarter add up, and an investor who recomputes them will ask.
Billing the whole quarter on the basis that applied on the first day. Fund accounting systems often set the fee basis per quarter, so a step-down that falls on 15 May is either ignored until 1 July or applied from 1 April. The first overbills by 620,376.71, the second underbills by 598,373.29, against a correct figure of 1,567,123.29. The second mistake is applying a side-letter discount as a blended reduction on the fund's invoice rather than on the investor's own record: the total may look right while one investor pays less and the others pay more. Once the basis switches, the questions move on to what counts as net invested capital, worked in how the management fee is calculated after the investment period.
The book's own quarter, with a step-down, a side-letter rate, a transaction-fee offset and a waiver, is reconciled in the free workbook for this case.
Normally yes: if the investment period ends on 15 May, that day is its last fee day and the new basis starts on 16 May. In the worked quarter that gives 45 days before and 46 after. Each day moved across the line changes the invoice by 13,356.16, so read the definition of the investment period end in the agreement rather than assuming.
Only if the agreement says so. On actual days over 365, a 91-day quarter at 1.75 per cent on 500 million is 2,181,506.85, not the 2,187,500.00 of a quarter of the annual fee. Under 30/360 the worked step-down quarter comes to 1,578,125.00, which is 11,001.71 more than actual/365.
On the investor's own record, at its own rates, for each part of the quarter. A 50 million investor at 1.50 and 1.00 per cent pays 131,534.25 instead of 156,712.33, a discount of 25,178.08. The fund's invoice of 1,541,945.21 is then the headline fee less exactly that amount, which is the reconciliation to run.
A quarter's management fee across a step-down that falls mid-quarter, with a side-letter rate and a transaction-fee offset, is worked in Chapter 9 of 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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