The fund charged fees on my commitment and then couldn't deploy it

$250k committed, three year term. Management fee 1.75%, and here's the clause I read and did not think hard enough about: charged on committed capital, not on invested capital.

The manager was disciplined, and I want to be fair to them about that. They'd stated a floor rate they wouldn't bid below. Auction competition in their core jurisdictions pushed clearing rates under that floor for most of the first year, and they held. By the end of year one they'd deployed 38% of my commitment. The rest sat in short treasuries earning very little.

Meanwhile the fee was $4,375 a year on the whole $250k regardless. Over the term I paid roughly $12,600 in management fees on capital that averaged maybe 55% deployed. Net to me across the three years came to about 3.9%. I'd modeled 8, which was probably optimistic, but 3.9 is a different asset.

The frustrating part is that I can't call the discipline wrong. Bidding through their floor to put my money to work would have produced worse outcomes, and I'd be writing about compressed yields instead. The problem is the fee base rewarded the manager identically whether they deployed or not, so the incentive to solve the deployment problem was carried entirely by their professionalism.

What I'd do differently: ask for the fee on invested capital, or a reduced rate on undeployed, and before committing ask for deployment pace by vintage year, in writing, per fund they've run. If a manager won't show me how fast previous money went to work I now assume the answer is slowly. Reading a private offering document is a job for a lawyer and mine caught a different clause, just not this one.

4 replies

4kevin_lombardPG1BPRO5

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?

1monica_tran3SF4CPRO6

Had the same structure bite me in a completely different asset. What I learned is that 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 just point in different directions and you find out which one you signed in year two.

2Rena Expert

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.

-1megan_doyle15 Get yours

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.

The fund charged fees on my commitment and then couldn't deploy it

4 replies