Management fee
The 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.
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Example
A $50M fund charges 2% of commitments for five years ($1M a year), then 1.5% of net invested capital for five more. Total fees over the term are roughly $8M to $9M, or 16% to 18% of commitments. Without the step-down they would be $10M.
Work it through on the management fee calculator.
Confused with
Carried interest. Carry is a share of profit and is paid only when there is profit. The fee is paid regardless.
Related terms
- Carried interest Carried interest is the general partner's share of a fund's profits, typically 20%, paid through the distribution waterfall only after limited partners have received their contributed capital and, usually, a preferred return.
- Capital call A 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.
- Hurdle rate (preferred return) The hurdle rate, also called the preferred return, is the annual return, commonly 8%, that limited partners must receive on their contributed capital before the general partner is entitled to carried interest in the distribution waterfall.