Advanced Finance

Fee Structures and Net Returns

Build the gross-to-net bridge yourself, and find out why a fund that doubles its money hands its investors substantially less than double.

  • Advanced
  • 9 min total
  • 12 chapters

What decision this helps you make: What a fund's headline return is actually worth to the person whose money it is, and which term in the fee structure is worth negotiating.

What this topic is

A fee structure is the full set of charges that sit between the return an investment generates and the return an investor keeps: the management fee and the base it is charged on, the performance fee or carried interest and the hurdle it must clear, and the fund expenses that never appear in either headline. The gross-to-net bridge is the arithmetic connecting the two numbers.

Why it matters

Almost every return figure quoted in private markets is ambiguous unless you ask which side of the fees it sits on, and the gap is large. A fund that doubles the money it invests can deliver something closer to one and a half times to the investor. Understanding the mechanics tells you which terms actually move that gap and which are decoration.

Who should learn it

Limited partners and their advisers, fund managers designing terms, family offices, and any operator being pitched a fund, syndicate or managed account.

What you will understand

  • Why the fee base matters more than the fee rate
  • How a hurdle, a catch-up and a carry split interact in sequence
  • The expenses that sit outside both headline fees
  • How to build a gross-to-net bridge for any structure put in front of you

Prerequisites

Common misconception

"Two and twenty means the manager takes 2% a year plus 20% of the gains: call it a bit over 20% of my return." Not close. The 2% is usually charged on money you committed rather than money that is working, over a decade, whether or not anything is invested; the 20% is calculated after a hurdle and a catch-up that most people misread; and fund expenses sit outside both. The spread between gross and net is routinely several hundred basis points a year.