Negotiating capital is limited. Pricing each concession through the waterfall, at more than one gross return, shows which terms deserve it.
Price each concession in dollars of net proceeds at the gross return you underwrite, not in headline percentage points. On an illustrative $100m commitment at a 2.00x gross multiple, cutting the post-investment-period fee from 1.5 to 1.0 per cent is worth $2.40m, a 25 basis point cut in the investment-period fee $2.00m, a carry cut from 20 to 17.5 per cent $1.90m, and moving the fee offset from 80 to 100 per cent $0.96m. The ranking flips with performance: below about 1.67x gross the carry cut is worth nothing, and deep in the catch-up band, at 1.75x, no concession is worth anything at all.
Worked in full in The Private Markets Limited Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Limited partners have a fixed amount of negotiating capital in any fundraise, and general partners concede some terms more easily than others. The useful question is not which term sounds largest but which one moves the LP's net proceeds most for the return the fund is likely to earn. That needs a waterfall, because fees and carry interact.
| Term | Base | Concession tested |
|---|---|---|
| Fee in the investment period, 5 years on commitments | 2.00% | 1.75% |
| Fee after the investment period, 5 years on $60.0m net invested | 1.50% | 1.0% |
| Offset of portfolio company fees ($3.0m attributable to the LP) | 80% | 100% |
| Carried interest, over an 8% preferred return with full catch-up | 20.0% | 17.5% |
| Average holding period, for the preferred return | 5 years | unchanged |
Net fees: $10.00m in the investment period + $4.50m after it ($0.90m a year) − $2.40m of offset = $12.10m.
Invested: $100m − $12.10m = $87.90m. Gross proceeds at 2.00x: $175.80m. Profit over the $100m paid in: $75.80m.
Preferred return: $100m × (1.085 − 1) = $46.93m. The catch-up ends at $46.93m ÷ 0.8 = $58.67m of profit, so the GP takes 20 per cent of $75.80m: carry of $15.16m.
Net to the LP: $175.80m − $15.16m = $160.64m, or 1.61x.
Rerun the waterfall with one term changed at a time and take the difference in net proceeds.
| Concession | Fee saved | Carry after | Net to LP | Worth to LP |
|---|---|---|---|---|
| Post-period fee 1.5% to 1.0% | $1.50m | $15.76m | $163.04m | $2.40m |
| Investment-period fee 2.00% to 1.75% | $1.25m | $15.66m | $162.64m | $2.00m |
| Carry 20.0% to 17.5% | none | $13.27m | $162.54m | $1.90m |
| Fee offset 80% to 100% | $0.60m | $15.40m | $161.60m | $0.96m |
A fee dollar saved is worth more than a dollar here: it is invested at 2.00x, then 20 per cent of the gain goes to carry. The $1.25m investment-period saving becomes $1.25m × 2.00 × 0.8 = $2.00m. The carry cut, by contrast, is worth exactly 2.5 per cent of the profit, $1.90m, and nothing more.
In Excel, with the waterfall on one sheet, a two-way data table over the term and the gross multiple gives every cell of the next table at once: =TABLE(term_cell, gross_cell) via What-If Analysis.
| Gross | Net to LP | Carry | Post fee to 1.0% | IP fee to 1.75% | Offset to 100% | Carry to 17.5% |
|---|---|---|---|---|---|---|
| 1.50x | 131.85 | 0.00 | 2.25 | 1.88 | 0.90 | 0.00 |
| 1.75x | 146.93 | 6.89 | 0.00 | 0.00 | 0.00 | 0.00 |
| 2.00x | 160.64 | 15.16 | 2.40 | 2.00 | 0.96 | 1.90 |
| 2.50x | 195.80 | 23.95 | 3.00 | 2.50 | 1.20 | 2.99 |
Three readings. Below 1.67x gross the fund never clears its preferred return, carry is zero, and only fee terms matter. Between 1.67x and 1.81x the fund is in the full catch-up, where every extra dollar of profit goes to the GP: a fee saving that raises profit is simply caught up, and a lower carry rate does not reach the band either. All four concessions are worth zero to the LP at 1.75x. Above the catch-up, the carry concession gains ground as returns rise and overtakes the 25 basis point fee cut at about 2.09x.
The usual mistake is to compare terms by their headline size: "2.5 points of carry" sounds bigger than "25 basis points of fee", and a GP will often concede the fee to protect the carry for precisely that reason. On the illustrative terms, 25 basis points of investment-period fee is worth at least as much as 2.5 points of carry at every gross multiple up to about 2.09x. Unless the LP underwrites the fund above that, it should spend its negotiating capital on fees first, and on the post-period fee base above all, because that fee runs for years after the GP has stopped deploying capital.
The second mistake is pricing each term at the fund's target return only. The value of a carry concession is concentrated in the best outcomes, the value of a fee concession in the ordinary ones. An LP that expects dispersion should price both across the range, as in the table, not at one point.
All four together are worth $7.42m at 2.00x gross, lifting the net multiple from 1.61x to 1.68x. That is slightly more than the $7.26m sum of the four taken separately, because a lower fee leaves more profit for the lower carry rate to act on.
Price LPA concessions in net dollars at a range of gross multiples. At an illustrative 2.00x, the post-period fee is the most valuable term, the investment-period fee and the carry rate are close behind and roughly equal, and the offset is worth half as much. The book's working documents include a page on the terms worth real leverage; they come with the free workbook for this book. The GP's side of the carry arithmetic is in how much a carry point is worth, and the full fee bill in what a 2 per cent fee costs over a fund's life.
Usually the fee, unless the fund performs very well. On an illustrative $100m commitment, cutting the investment-period fee by 25 basis points is worth $2.00m at a 2.00x gross multiple, against $1.90m for cutting carry from 20 to 17.5 per cent. The carry cut only overtakes above about 2.09x gross, and is worth nothing below 1.67x.
Because fees are drawn from the commitment, so a dollar not paid in fees is invested. At a 2.00x gross multiple with 20 per cent carry, each dollar saved returns 2.00 times 0.8, or $1.60. The $1.25m saved by a 25 basis point cut over five years becomes $2.00m of net proceeds.
Because of the full catch-up. Between about 1.67x and 1.81x gross in the illustrative fund, every extra dollar of profit goes to the GP until it has 20 per cent of the total. A fee saving that raises profit in that band is caught up in full, so at 1.75x all four concessions tested are worth zero to the LP.
This article is one calculation from The Private Markets Limited Partner. 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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