Fee offset
A reduction of the management fee by other fees the manager earns from portfolio companies.
If the management company collects transaction, monitoring or directors' fees from investments, an offset returns some or all of them to LPs by lowering the management fee.
A 100 percent offset, where every dollar of portfolio fees reduces the management fee by a dollar, has become the expectation of most institutional LPs. Older funds often used 50 or 80 percent. Placement agent fees and certain organisational expenses above a cap are usually offset in full as well.
LPs also ask which fees count, such as transaction, monitoring, director and break-up fees, and whether fees earned by affiliates or operating partners are included. Disclosure matters as much as the percentage.
Worked example
A fund's management fee is $1M for the year. The management company earns $300,000 in transaction and monitoring fees from portfolio companies. With a 100 percent offset, LPs pay $700,000 in management fees. With an 80 percent offset they pay $760,000.
Common questions about fee offset
What is a typical fee offset?
One hundred percent is now the norm for institutional funds, meaning all portfolio fees earned by the manager reduce the management fee. Lower percentages are seen in older or smaller funds.
Do venture capital funds have fee offsets?
Venture funds rarely earn transaction or monitoring fees from portfolio companies, so offsets matter less. LPAs still usually include them for director fees and any placement agent costs.