Fund economics

Fee step-down

Also called step-down, post-investment-period fee.

Definition

Fee step-down is the reduction in a fund's management fee that takes effect after the investment period, when the rate falls, the basis switches from committed capital to invested capital or net invested cost, or both, reflecting that the manager is now harvesting rather than deploying.

Updated October 9, 2026Checked against our editorial standards

Example

An $80M fund charges 2% of commitments during a five-year investment period: $1.6M a year, $8M in total. In year six the basis switches to net invested capital and the rate drops to 1.5%. The fund has invested $60M, of which $10M of cost has been realised, so the basis is $50M and the fee is $750,000. As more positions are sold the basis shrinks and the fee follows it down. Without the step-down the fund would have charged another $1.6M a year for the remaining term.

Confused with

Management fee offset. The offset is a credit for fees received from portfolio companies. The step-down is a scheduled reduction written into the LPA.

Successor fund trigger. Many LPAs also step the fee down early when the manager starts charging fees on a successor fund. Same effect, different trigger.

In practice

The definition of the new basis is where disputes start. Net invested capital may mean cost less realised cost, or cost less realised cost less write-downs, and the two can differ by a lot after a bad year. The trigger date, usually the end of the investment period or the first close of the next fund, should be recorded so the administrator applies it on the first fee call after it.

Related terms

Management feeThe management fee is an annual charge paid by the fund to the management company, typically 2% of committed capital during the investment period, often stepping down afterwards to a lower rate or a basis of invested capital, to cover salaries, rent and the cost of running the firm.
Management fee offsetManagement fee offset is the mechanism in a limited partnership agreement by which fees the general partner or its affiliates receive from portfolio companies, such as transaction, monitoring, advisory or director fees, reduce the management fee charged to the fund, in whole or in part.
Capital callA capital call, also called a drawdown, is a notice from the general partner requiring each limited partner to wire a portion of their committed capital to the fund by a due date, usually ten business days, to fund investments, fees or expenses.
Unfunded commitmentUnfunded commitment is the portion of a limited partner's capital commitment that the fund has not yet called, calculated as total commitment less contributions to date plus any distributions the LPA makes recallable, and represents the LP's remaining obligation to fund capital calls.