Adding up a private fund's management fee from the rate, the base and the step-down, and the clause that moves it most.
Add the fee year by year: the headline rate on commitments for the investment period, then the step-down rate on whatever base the agreement names, until the fund is wound up. On an illustrative $500m fund charging 2 per cent for five years and then 1.5 per cent on net invested capital, the total is $69.1m, 13.8 per cent of commitments, not the 20 per cent that "2 per cent for ten years" suggests, and 16.3 per cent of the capital actually invested.
Worked in full in How to Read a Limited Partnership Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A limited partnership agreement never states the total fee. It states a rate, a base, a period and a step-down, usually across two or three clauses, and leaves the reader to put them together. The total depends as much on the base after the investment period as on the headline rate, and the base is the clause investors read least carefully.
| Term | Value |
|---|---|
| Commitments | $500m |
| Investment period | 5 years |
| Fee during the investment period, on commitments | 2.0% |
| Fee afterwards, on opening net invested capital | 1.5% |
| Fund term | 10 years |
| Capital invested at cost over the first five years | $425m |
Feet = 2.0% × commitments while t ≤ investment period
Feet = 1.5% × opening net invested capital afterwards
Net invested capital rolls forward as opening + invested at cost − cost of investments realised. In Excel, per year column: =IF(Year<=IP, Rate1*Commit, Rate2*OpeningNIC)
| Year | Opening NIC | Invested | Realised at cost | Fee |
|---|---|---|---|---|
| 1 | 0 | 90 | 0 | 10.000 |
| 2 | 90 | 110 | 0 | 10.000 |
| 3 | 200 | 110 | 0 | 10.000 |
| 4 | 310 | 70 | 0 | 10.000 |
| 5 | 380 | 45 | 0 | 10.000 |
| 6 | 425 | 0 | 70 | 6.375 |
| 7 | 355 | 0 | 90 | 5.325 |
| 8 | 265 | 0 | 105 | 3.975 |
| 9 | 160 | 0 | 90 | 2.400 |
| 10 | 70 | 0 | 70 | 1.050 |
| Total | 425 | 425 | 69.125 |
Total fees are $69.125m: $50.0m in the investment period and $19.125m after it. That is 13.8 per cent of commitments, an average of 1.38 per cent a year over ten years, and 16.3 per cent of the $425m actually put to work. The investment period carries 72.3 per cent of the total, because the fee is charged on the whole commitment before most of it has been called.
The fees are funded from the same commitments as the investments. Invested capital plus fees comes to $494.1m of the $500m, so the fund that markets itself as a $500m fund buys $425m of companies. Recycling provisions exist largely to close that gap.
| Clause changed | Total fees | Change |
|---|---|---|
| Base case | 69.125 | |
| Post-period fee on commitments instead of net invested capital | 87.5 | +18.4 |
| No step-down: 2.0% on net invested capital | 75.500 | +6.375 |
| Step-down to 1.75% instead of 1.5% | 72.312 | +3.188 |
| Investment period six years, exits unchanged | 72.750 | +3.625 |
| Investment period six years, exits slip a year | 78.075 | +8.950 |
The base after the investment period is the biggest lever by far. Charging 1.5 per cent on commitments rather than on net invested capital adds $18.4m, more than a quarter of the base-case total, and it does so in the years when the manager has least work to do. The step-down rate itself matters less: a quarter point is worth $3.188m.
The investment period extension shows why fee clauses must be read against the realisation schedule. One more year at 2 per cent on commitments costs $3.625m if exits stay where they were. If the extension comes with exits a year later, which is usually why it was requested, the cost is $8.950m, because every later year is also charged on a larger base. An extension of the fund term adds more: if $70m of cost were still unrealised, two further years at 1 per cent would be another $1.4m.
The practical consequence for a reviewer is to ask the manager for the fee schedule rather than the fee rate. A manager will have a pacing model for the fund; running the agreement's fee clauses through it takes minutes and produces a figure that can be compared across funds with different structures. Two funds both quoting 2 per cent can differ by more than the $18.4m above once the post-period base, the step-down and the extension terms are applied to their own investment and realisation schedules.
The quick estimate is rate times term times commitments: 2 per cent × 10 × $500m = $100m. It overstates this fund by $30.9m, and the error teaches the wrong lesson, because it makes the headline rate look like the negotiation. On these figures the headline rate fixes $50.0m that nobody will move. The post-period base, the step-down and the treatment of extensions decide the rest, and they are the clauses to read first.
Which net invested capital? Check whether written-down investments reduce the base, whether the base is opening, average or closing for the period, and whether fee offsets from transaction and monitoring fees apply. Each changes the post-period total, and none of them is visible in the headline rate.
Compute the fee as a schedule, not a rate: on this fund $69.125m, 13.8 per cent of commitments, with a further $18.4m riding on one word in the post-period base. The free companion workbooks for the book include a blank fee model for your own fund, and the quarterly mechanics of offsets are worked in a related article.
Usually well under rate times term. On an illustrative $500m fund at 2 per cent on commitments for five years and 1.5 per cent on net invested capital for five more, fees total $69.125m, or 13.8 per cent of commitments and 1.38 per cent a year on average. Rate times term would suggest 20 per cent, overstating by $30.9m.
Usually, in two ways: the rate falls and the base switches from commitments to net invested capital. The base matters more. On a $500m fund, a 1.5 per cent post-period fee on commitments instead of net invested capital adds $18.4m, while raising the stepped-down rate by a quarter point adds only $3.188m.
One more year at 2 per cent on $500m of commitments costs $3.625m if exits do not move. If they slip a year with it, the cost is $8.950m, because each later year is charged on a larger net invested capital base. Investors should price an extension against the realisation schedule, not the single year.
The free companion files take the fee clause line by line as a case set against chapters 6, 7 and 11 of How to Read a Limited Partnership Agreement. 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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