Definition
Management Fee
A management fee is the annual charge LPs pay the GP to cover the fund's operating costs, usually around 2% of committed or invested capital.
The management fee funds salaries, due diligence, legal costs and the firm's overheads, independent of investment performance. In a '2 and 20' fund, the fee is 2% per year. It is often charged on committed capital during the investment period and on invested capital thereafter.
Unlike carried interest, the management fee is earned regardless of returns, which is why LPs scrutinise it. Over a ten-year fund life, fees materially reduce LPs' net returns, so larger funds sometimes charge a lower percentage.
Related terms
- Limited Partner (LP)A limited partner is an investor who commits capital to a fund but does not run it, with liability limited to the amount invested.
- Carried InterestCarried interest, or carry, is the share of a fund's profits that the general partner keeps as performance pay, typically around 20% and only after investors clear a minimum hurdle return.
- General Partner (GP)A general partner is the fund manager that raises a private fund, makes the investment decisions and earns mainly through carried interest.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.