What is Management Fee?
Management fees cover fund operating costs: salaries, office, travel, legal, etc. LPs pay 1.5-2.5% of committed capital annually. Fees are charged regardless of fund performance.
Fee Structure
During investment period (years 1-5), fees are on committed capital. After investment period, fees often step down and shift to invested capital. Total fees over fund life can be 15-20% of the fund.
Why Founders Care
Fees come out of the fund, reducing capital available for investments. A $100M fund with 2% annual fees loses $20M to fees over 10 years. Only $80M actually gets invested.
Formula
$100M fund, 2% management fee:
- Annual fee: $2M
- 10-year fund life: $20M total fees
- Capital for investments: ~$80M
Partner salaries, operations, legal all come from this.
Example
$200M fund with 2%/1% structure:
- Years 1-5: 2% on $200M = $4M/year = $20M
- Years 6-10: 1% on $150M invested = $1.5M/year = $7.5M
Total fees: $27.5M over fund life.
~$172.5M available for actual investments.