Management Fee

The management fee is the annual compensation that a fund manager receives for their work. It is usually calculated as a percentage of assets under management. The manager uses it to cover the ongoing costs of the team and operations. Around two percent per year is market standard, with the basis changing over the fund's life: during the investment period it is charged on total commitments, afterwards on capital still invested, so the fee falls as realisations progress. The rate of around two percent is a guide value, as actual terms vary by fund and market environment. Larger funds frequently agree lower rates, because a team's costs do not grow proportionally with fund size.

Economically the fee is the counterpart to carried interest: it accrues regardless of success and covers in particular salaries, offices and other ongoing costs of the manager. That creates a conflict of interest, since a very large fund secures the manager a high income even without good results. Investors therefore look for carried interest to make up the larger part of the manager's income and for the manager to be meaningfully invested in the fund itself. Also negotiated are the offset of transaction and advisory fees the manager receives from portfolio companies and the treatment of costs for aborted processes.

Across the fund's life the fee accumulates to a substantial share of committed capital, noticeably reducing net returns. Besides the fee itself, investors care which costs may additionally be charged to the fund, because the boundary between manager costs and fund costs leaves considerable scope: costs for aborted diligence, legal advice, reporting systems and travel can fall to either side depending on the agreement.