What is a fee step-down?

The step-down is set out in the LPA’s management fee provision and is usually triggered by the end of the investment period or by the launch of a successor fund. Funds vary in whether they cut the rate, change the base, or do both. Net invested capital is often reduced by write-downs and realizations. It is often confused with a fee offset, which reduces fees by other income.

Say a fund charges 2% on $1 billion committed. Afterward it charges 1.5% on the $600 million still invested, so the fee falls from $20 million to $9 million a year.

It matters most to investors in funds that sit on assets for years, because it is where later-life fees fall.