Management Fee Calculator

Worked example: 2 and 20 on a 1,000 fund

A five-year investment period, a ten-year life, and a step-down to 1.5 percent.

A 2.0x gross outcome becomes roughly 1.5x net to the LP once fees and carry are taken out. That gap, not the gross number, is what an LP is buying.

Method

Fund economics have two parts. A management fee is charged annually as a percentage of a stated basis, traditionally committed capital during the investment period and a reduced basis afterwards. Carried interest is a share of profit, traditionally twenty percent, paid to the general partner after capital and any preferred return are met.

Enter fund size, the fee rate, the investment period, total fund life, a stepped-down post-period rate, the carry rate, and a gross multiple assumption. The year-by-year table shows the fee charged and cumulative fees, and the summary shows total fee drag, the capital left to invest after fees, carry on gross profit, LP net proceeds, and the resulting net multiple. Together they answer the question that matters: what share of the value created reaches the LP.

1. 1. Set fund size and fee rate

   The traditional basis is committed capital during the investment period.

2. 2. Set the investment period and fund life

   Fees continue past the investment period, usually at a reduced rate.

3. 3. Apply the step-down

   Enter the post-period rate so later-year fees are not overstated.

4. 4. Add carry on gross profit

   A share of profit above returned capital, traditionally twenty percent.

5. 5. Compare gross to net

   Read the LP net multiple against the gross multiple you assumed.

The headline two and twenty understates total fee drag because the fee is charged for the whole fund life, not just the investment period. A two percent fee over ten years is roughly twenty percent of committed capital in cumulative fees, which is why the capital actually available to deploy is well below the headline fund size and why gross returns have to clear a meaningful bar before an LP sees a net gain. Several structural terms move the answer materially. The fee basis after the investment period is negotiated: stepping down to a lower rate, or moving the basis from committed capital to invested capital or cost of unrealized investments, reduces later-year fees substantially. Transaction and monitoring fees charged to portfolio companies are typically offset against management fees at eighty to one hundred percent under modern LPAs, and the offset percentage is worth checking. On the carry side, whether the waterfall is European, distributing carry only after the whole fund returns capital and preferred return, or American, allowing deal-by-deal carry, changes when the GP gets paid and how much clawback risk exists. A preferred return, commonly eight percent, sits ahead of carry, and a full catch-up lets the GP take a high share of the next dollars until the target split is reached. Larger funds have also seen fee compression, so a multi-billion dollar vehicle may charge well below two percent while a first-time fund charges at or above it. Use this calculator to make the gross-to-net gap explicit before comparing a manager's marketing multiple to what an LP would actually earn.

Related

• Carry Waterfall Visualizer
• DPI and TVPI Calculator
• MOIC Calculator
• IRR Calculator
• PE glossary