Management fee
The annual fee LPs pay the manager to run the fund.
It is usually a percentage of committed capital during the investment period and then of invested capital, with two percent a common starting point that varies widely. It pays for the team and operating costs, not for performance.
Venture funds often charge 2 to 2.5 percent, larger buyout funds 1.5 to 2 percent, and many funds step the fee down after the investment period, either to a lower rate or to a basis of invested capital only. Over a ten year life, total fees commonly add up to 12 to 20 percent of commitments.
Small funds face a real tension: 2 percent of $30M is $600,000 a year, which may not cover a team, so some GPs propose higher rates or a budget-based fee. LPs will test any proposal against the team's actual costs and against what similar funds charge.
Worked example
A $50M fund charges 2 percent on commitments for a five year investment period, $1M a year or $5M in total. It then charges 1.5 percent on $40M of invested capital, $600,000 a year, for five more years, adding $3M. Total fees of about $8M equal 16 percent of commitments over the fund's life.
Common questions about management fee
What is a typical management fee for a venture capital fund?
Around 2 percent of committed capital a year during the investment period is the most common starting point, with many funds stepping down afterwards. Very small funds sometimes charge more, and large funds often charge less.
Is the management fee charged on committed or invested capital?
Usually on committed capital during the investment period, then on invested capital or at a reduced rate afterwards. The exact basis is set in the LPA and is a common point of negotiation.