Management fee
LBOThe annual fee a fund's investors pay its manager, charged on committed capital during the investment period and on invested capital afterwards.
Also written: fund management fee, two and twenty
A management fee at fund level is paid by limited partners to the manager and never touches an operating company. It is charged annually on committed capital while the fund is still investing, then usually switches to invested capital, so it falls as assets are realised. Two and twenty is the familiar shorthand for a 2% fee and a 20% profit share, and it should be treated as shorthand rather than as a fact about any particular fund: terms are negotiated, vary with size and strategy, and large funds have generally settled below the headline.
What it pays for is the firm rather than the deals: salaries, offices, technology, and the cost of pursuing transactions that never complete. It is an operating budget, not a profit share. That is also why it is contested, because it is the one part of a manager's economics that is not contingent on anything going well, and the architecture of offsets and post investment step downs exists to limit exactly that.
It is worth being deliberate about the word. A monitoring fee charged to a portfolio company is also routinely called a management fee, and the two have nothing to do with each other: one is a cost of the company being valued, the other is a cost borne by the fund's investors. The same two words are used again for an unrelated component of an equity underwriting spread, which belongs to the capital markets material.
The practical effect on returns is that a fund's investors measure against everything they committed, including the portion drawn to pay this fee, while a deal team measures against capital that actually reached a company. Gross and net are different numbers, and asking which is being quoted is always a fair question.
Worked example
A fund raises 1,000 of commitments, draws 200 over its life for fees and expenses, and invests 800.
Proceeds of 2,000 are 2.5 times on the 800 invested, which is what a deal team reports.
The investor measures 2,000 against the full 1,000 committed, which is 2.0 times before any carried interest, and 1.8 times after it. Half a turn of the gap is the denominator alone.