Part 23 rounds out the series' coverage of fund economics by focusing specifically on cost structuring — a topic distinct from, though related to, the carried interest and waterfall mechanics covered in Part 13.
Q1. What's the difference between "management fee" and "fund expenses" in an AIF's cost structure?
Management fee is a defined compensation paid to the investment manager for managing the fund, per the PPM's stated formula. Fund expenses are separate operational costs incurred by the fund itself — audit fees, legal costs, custodian fees, regulatory filing costs — typically borne directly by the fund (and therefore indirectly by investors) rather than by the manager out of its own fee.
Q2. Is there a cap on how much a fund can charge for management fees and expenses combined?
The AIF Regulations and the fund's own PPM govern permissible fee and expense structures; there isn't a single universal statutory cap applicable across all fund types, but disclosure of the full fee and expense structure to investors upfront in the PPM is mandatory, and funds should ensure actual charges match what was disclosed.
Q3. How does the fee basis typically change between a fund's investment period and its post-investment period?
Many PPMs specify a step-down structure — fee calculated on committed capital during the active investment period, stepping down to a lower rate calculated on invested/drawn-down capital once the investment period ends and the manager's role shifts toward portfolio monitoring rather than active deal sourcing.
Q4. Are fund-level expenses allocated equally across all investors, or proportionally?
Typically proportionally — allocated based on each investor's committed or drawn-down capital (consistent with however the PPM defines the allocation basis), rather than split equally regardless of investment size.
Q5. Does GST apply to the management fee charged by the investment manager?
Yes, generally — management fees charged by the investment manager to the fund are treated as a taxable supply of services and are subject to GST at the applicable rate, which needs to be factored into the fee structure investors ultimately bear.
Q6. Is GST also applicable to carried interest?
This is a more nuanced, fund-specific question — since carried interest, where structured as a genuine share of investment profits through the fund's own unit/interest economics rather than a distinct fee-for-service, may be analysed differently for GST purposes than a straightforward management fee. This determination depends heavily on the specific legal structuring of the carry arrangement.
Q7. Can a fund offset transaction or monitoring fees earned by the manager from portfolio companies against the management fee charged to the fund?
Some PPMs include an explicit fee offset mechanism, crediting some or all of such portfolio-company-level fees against the management fee otherwise payable by the fund — but this needs to be an explicit, quantified provision in the PPM, not an informal practice.
Q8. How should fund expenses incurred before the first closing (organisational/set-up costs) be treated?
These are typically capped at a specified amount in the PPM and recovered from the fund (across all investors, including those admitted at later closings) once the fund begins operations, rather than being borne solely by initial-closing investors.
Q9. What happens to management fee obligations for an investor admitted at a subsequent closing?
Subsequent-closing investors typically owe a catch-up management fee for the period since the fund's first closing, calculated per the PPM's formula, in addition to their catch-up capital contribution — ensuring the manager isn't effectively working for a reduced fee base during the period before the later investor's admission.
Q10. Should fee and expense disclosures in the PPM specify exact percentages, or can they use ranges?
Best practice — and increasingly, investor and regulatory expectation — is for fee percentages and expense caps to be stated precisely rather than as broad ranges, since ambiguity here directly translates into computation disputes later in the fund's life.
Q11. How are fee and expense figures verified during an annual audit?
The auditor independently recomputes the fee based on the PPM's stated formula and the fund's actual committed/invested capital figures for the period, and compares this to what was actually charged — a mismatch here is one of the most common audit findings across AIFs (see our AIF Audit Checklist article).
Q12. Why do investors increasingly scrutinise fee and expense structures as closely as headline return figures during due diligence?
Because fees and expenses are a certain, contractual drag on returns regardless of fund performance — unlike carry, which only applies above a hurdle — sophisticated investors increasingly model out the full fee/expense structure's impact on net returns before committing capital, not just the headline gross return the manager is targeting.
Structuring Fees That Are Both Fair and Fully Compliant
We advise on fee and expense structuring at PPM drafting stage, and independently verify fee computations as part of our AIF audit engagements — including GST treatment of the fee and carry structure.
This FAQ is for general informational purposes and does not constitute tax or legal advice on fee structuring specific to any fund.