What is a management fee?

The fee is set in the LPA and usually paid quarterly or semiannually, often in advance, with drawn capital funding it. After the investment period it typically steps down or moves to a base of invested capital or net asset value. Fund-level offsets for transaction or monitoring fees often reduce it. It is distinct from carried interest, which is performance-based.

Say a $1 billion fund charges a 2% fee on committed capital. Investors pay the manager $20 million a year, even before the fund has made a single investment.

It pays the manager’s costs whether or not the fund makes money, so investors compare it across funds first.