How management fees are calculated
Bases, step-downs, offsets and waivers — with a worked example.
How are private equity management fees calculated?
Typically as an annual percentage — often 1.5% to 2% — of committed capital during the investment period, switching to a lower rate or to invested capital or NAV afterwards, then reduced by offsets from portfolio-company fees and any investor-specific waivers set in side letters.
A worked example
A $500m fund charges 2% on commitments during a five-year investment period: $10.0m a year. Afterwards it charges 1.5% on invested capital; with $300m invested, that is $4.5m a year. If the manager earns $1.0m of monitoring fees from portfolio companies and the LPA has a 100% offset, that quarter's fee is reduced by $1.0m in total, allocated across LPs. Figures illustrative.
Step-downs
Fees often step down when the investment period ends, when a successor fund starts charging fees, or at set dates.
Waivers and side letters
Large or early investors may receive rate breaks; the GP commitment usually bears no fee. These are investor-level overrides.
Getting it right
Fee errors are among the most common issues in SEC examinations. Calculate from commitments and investments on the ledger, apply offsets from recorded portfolio-company fees, and keep the calculation.
Questions
Do LPs pay fees on uncalled capital?
During the investment period, commonly yes — fees on commitments are usually funded through capital calls.
Related reading
Management fee and fund expense allocation · Management fee · Management fee offset
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