Management Fee Is How Managers Get Paid to Run the Fund — Regardless of Performance

Unlike carried interest, which depends entirely on fund performance, the management fee is a fixed, recurring charge that compensates the manager for running fund operations — deal sourcing, portfolio monitoring, and administration — earned whether or not the fund ultimately performs well.

Common Bases for Calculating Management Fee

1. Fee on Committed Capital

Calculated as a percentage of each investor's total committed capital, regardless of how much has actually been drawn down. Common during a fund's investment period, when the manager is actively deploying capital and incurring deal-sourcing costs across the full committed pool.

2. Fee on Invested/Drawn-Down Capital

Calculated only on capital actually called and invested, excluding undrawn commitments. Many funds shift to this basis after the investment period ends, reflecting that the manager's role shifts from active deal-sourcing to portfolio monitoring of a now-fixed capital base.

3. Fee on NAV

Calculated as a percentage of the fund's current net asset value — less common for closed-ended Category I/II AIFs, more relevant for structures with ongoing valuation-linked fee models.

Typical Fee Structures Over a Fund's Life

Many AIF PPMs specify a step-down structure — for example, a fee on committed capital during the investment period, stepping down to a lower percentage on invested capital during the fund's harvesting/exit period. This reflects the natural reduction in active deal work as the fund matures.

What Should Be Explicit in the PPM

• The exact fee percentage and the base it's calculated on
• Whether/when the fee basis changes (e.g., committed capital → invested capital) and the trigger event for that change
• Treatment of fee for investors admitted at subsequent closings — typically prorated from their admission date, with catch-up fee due for the period since the fund's first closing
• Any fee offsets (e.g., against transaction or monitoring fees the manager separately earns from portfolio companies)

Why Fee Miscalculation Is a Recurring Audit Finding

The most common issue we see is a fee basis that quietly drifts from the PPM's stated formula — particularly around the timing of the committed-to-invested capital transition, or incorrect proration for subsequent-closing investors. These errors compound over a fund's multi-year life if not caught early.

Getting Fee Calculations Right, Every Period

We build management fee calculations directly into fund financial models, tied explicitly to PPM language, and verify them as part of our AIF audit engagements.

This article is for general informational purposes. Please refer to your fund's PPM for its specific management fee terms.

AIF ARTICLE HUB — BATCH 3 (ARTICLES 15-20, FINAL)

Type for all: Blog / Article | Category for all: Funds & AIF Advisory | Author for all: CA Anuj Desai