Case study: a tax lien fund that charged fees on committed capital it never deployed

Committed capital was a new term for me. So you promise $250k, they call it in pieces as they find liens to buy, but the fee is calculated on the promise rather than on what's actually working. That seems like a strange default and yet you're saying it's normal?

The same structure bites in completely different asset classes. The fee base tells you what the manager is being paid to do. Paid on commitment means paid to raise. Paid on invested means paid to deploy. Neither one is dishonest, they simply point in different directions, and you find out which one you signed in year two.

The two fee bases produce genuinely different behavior and your description of the tension is accurate. A fee on committed capital pays for the standing capability to bid, which is real. Somebody has to maintain registrations, staff auction days, and keep the per-county deadline calendars whether or not clearing rates are attractive that season. A fee on invested capital shifts the cost of waiting onto the manager, which sharpens the deployment incentive and also creates pressure to bid when bidding is bad. Managers who have watched a vintage get destroyed by overpaying tend to argue hard for the commitment base for exactly that reason.

The diligence item is the one you named. Deployment pace by vintage, with the dates capital was called and the dates certificates were acquired, is the document that tells you whether the floor discipline you were sold has ever been tested. Ask for it before signing and ask what they did in the seasons where clearing rates fell below their floor. A manager who has never faced that has an untested policy.

Your 3.9% is roughly what you would expect from a book that is half deployed at reasonable rates with a full fee load. The math is doing what the structure said it would.

On the document itself, the terms in a private offering vary by fund and the fee definitions are the part most often misread. Have securities counsel walk the fee and expense sections specifically, and get any side agreement on fee base in writing.

Everything in this thread is new to me but I understood the sentence about paying a fee on money that isn't doing anything. That one translates.