🛠️ Investment Fund Key Terms, Part 23

🎉 Happy Friday, funds family!

Today, we have Part 23 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

• Part 1: Naming your entities

• Part 2: Investment objectives

• Part 3: Fund size

• Part 4: LP minimum check size

• Part 5: GP commitment

• Part 6: Fund term

• Part 7: Fundraising period

• Part 8: Investment period

• Part 9: Capital recycling

• Part 10: Investment limitations

• Part 11: Leverage Limitations

• Part 12: LP Withdrawals

• Part 13: Key Person Event

• Part 14: Successor Funds

• Part 15: Carried Interest

• Part 16: Preferred Returns

• Part 17: GP Catch-Up Provisions

• Part 18: American vs. European Waterfalls

• Part 19: Split Waterfalls (Cash Flow / Dispositions)

• Part 20: Carried Interest Clawbacks

• Part 21: LP Giveback

• Part 22: Management Fees

This week focuses on Fees Paid to GP Affiliates.

In addition to management fees and carried interest, many funds pay other fees to the GP or its affiliated entities.

These fees are common in many asset classes, but they are also one of the most scrutinized (and negotiated) areas of fund economics. LPs should understand them clearly, and GPs should disclose them carefully.

➡️ What are “affiliated fees”?

“Affiliated fees” are fees paid by the fund or its portfolio investments to the GP, the Management Company, or entities controlled by the GP principals.

These fees typically compensate the sponsor for transaction-level work, operational involvement, or risk assumed in connection with specific investments.

➡️ Common examples of affiliated fees

Depending on asset class, these fees may include:

• Acquisition/closing fees – often 1-3% of the purchase price of an asset
• Disposition fees – commonly 1% or less of the sale price
• Property management fees – often 3-7% of gross rents
• Development or construction fees – commonly ~5% of hard costs
• Guarantee fees – often 0.5-1% of personally guaranteed debt

Not every fund charges these fees, and some asset classes (e.g., venture funds) typically don’t have these fees at all.

➡️ Why do these fees exist?

Affiliated fees compensate the sponsor for real work or real risk that falls outside the scope of general fund management, such as sourcing deals, overseeing construction, operating assets, or personally guaranteeing debt.

These fees function as an additional revenue stream for the sponsor, which is why they receive close scrutiny. If you’re an LP, carefully review every way the GP makes money. Usually, the GP is entitled to these fees regardless of the profitability of the fund or syndication.

➡️ Fee offsets are common

Many LPs negotiate management fee offsets, meaning some or all affiliated fees reduce the management fee dollar-for-dollar. For example, board fees, monitoring fees, and transaction fees paid by portfolio companies to the GP or its affiliates often reduce the management fee.

These offsets help prevent “double dipping” by the GP. However, fees charged directly to the fund (like acquisition fees) typically do not reduce the management fee.

➡️ Disclosure is critical

Regardless of whether LPs like these fees, they must be clearly disclosed in the fund’s documents and marketing materials. Any new affiliate fees should be approved by the LPs as a whole group or the LP advisory committee.

Undisclosed affiliated fees are a major red flag and can create serious legal, regulatory, and reputational risk for sponsors.

⏩ Next up in Part 24: Fund Expenses vs. GP Expenses

Thanks for reading, everyone.

Have a great weekend! 🙌 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.