Glossary · Fund economics

What is a management fee offset?

A fee offset reduces the management fee by some or all of the transaction, monitoring or director fees the manager collects from the companies a fund owns.

In practice

The offset is set out in the LPA’s fee provisions, and the percentage varies: 100% is common in buyout funds, while some funds offset only part. Excess offsets may carry forward or be paid out at fund end. Often confused with fee waivers, where the manager gives up fees to fund its GP commitment.

An example

Round numbers, not a real fund

Say a manager’s fee is $20 million a year and it charges portfolio companies $4 million in monitoring fees. With a full offset, investors pay $16 million.

Why it matters

It settles whether investors or the manager keep the fees the manager charges the fund’s own portfolio companies.

A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.

Related terms

Management feeThe management fee is the annual charge investors pay a manager to run a fund, often 1% to 2% of committed capital during the investment period.
LPAThe limited partnership agreement, or LPA, is a private fund’s main contract. It sets the fees, carry, investment limits and the rights of the manager and the investors.
Fee step-downA fee step-down lowers the management fee once the investment period ends, often by moving the fee base from committed capital to the cost of investments still held.
GP commitmentThe GP commitment is the money a manager and its partners invest in their own fund alongside investors, often a few percent of the fund’s total.
ILPAILPA is the Institutional Limited Partners Association, an industry body of investors that publishes best-practice principles on fund terms, fee reporting and governance.

The terms, in the news each morning.

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