The asset management fee — usually quoted as a single percentage on the cover of a PPM — is the single biggest source of fee drag in a typical private fund. It's also the line where the basis matters far more than the rate. A 1.5% fee on the wrong basis is materially worse than a 2% fee on the right one.
The four bases you'll see
- Committed capital
- The fee is charged on the LP's total commitment, regardless of how much has actually been called. Sponsor-friendly during the investment period (the GP is paid on capital that hasn't been deployed yet); LP-friendly afterward (the GP can't inflate the basis by holding investments longer).
- Invested equity
- The fee is charged on capital actually deployed into deals — not commitments, not AUM. Most LP-favorable. The GP only earns the fee on capital that's working.
- Assets under management (AUM)
- The fee is charged on the gross asset value, including leverage. Most sponsor-friendly; a 60% LTV deal effectively triples the basis compared to invested equity. Common in real estate funds where leverage is structurally high.
Why the basis matters more than the rate
Take a $100M real-estate value-add fund deploying $50M of LP equity into deals with 60% LTV. Same 1.5% fee, four bases:
| Basis | Notional ($M) | Annual fee ($M) |
|---|---|---|
| Invested equity ($50M deployed) | $50.0 | $0.75 |
| Committed capital ($100M total) | $100.0 | $1.50 |
| NAV (assume 1.2× mark on equity) | $60.0 | $0.90 |
| AUM (60% LTV → $125M asset value) | $125.0 | $1.88 |
Annual fee dollars range from $750k to $1.88Mdepending on the basis — a 2.5× spread on the same headline rate. Over a 5-year hold the cumulative difference is bigger than the typical acquisition fee, the disposition fee, and the GP's carry on a borderline deal, combined.
Step-downs
Most LPAs include a fee step-down after the investment period ends. The fee continues, but on a reduced basis or at a lower rate. Common patterns:
- Same rate, smaller basis. 1.5% on committed capital during the investment period, 1.5% on invested capital net of write-offs and realized dispositions after — meaning the basis shrinks naturally as deals exit.
- Lower rate, same basis. 1.5% during investment period, 1.0% during the harvest period.
- Cliff to zero.Fee terminates entirely after the fund's 8th anniversary or the harvest period ends. Common in LP-favorable institutional vehicles.
What to ask
- What's the basis during the investment period? Invested equity is the LP-favorable answer.
- What's the basis after the investment period? Look for it shrinking as deals exit, not staying static.
- How does the fee handle write-offs? The most LP-friendly structure removes write-offs from the basis immediately. Sponsor-friendly LPAs continue to charge on impaired investments.
- Are there management-fee offsets for transaction fees (acquisition, disposition, financing)? See Acquisition Fees for why these matter.
The biggest single thing you can do to evaluate a fund's fee load honestly is to convert every fee to a dollar amount on your actual commitmentover the actual hold period. Rate × basis × time, not just the headline rate. That's the number that comes out of your eventual proceeds.