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- 🛠️ Investment Fund Key Terms, Part 24
🎉 Happy Friday, funds family!
Today, we have Part 24 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):
This week focuses on Fund Expenses vs. GP Expenses.
But first..
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Thanks for reading. Now, let’s jump into the article 😃
One of the most common (and most misunderstood) areas of fund economics: Who pays for what? 💳
Every fund incurs costs. The key question is whether those costs are properly borne by the fund (and indirectly the LPs) or by the GP or management company itself.
➡️ What are “fund expenses”?
Fund expenses are costs incurred in operating the fund and making investments, and are typically paid directly by the fund.
Common fund expenses include:
Organizational and offering costs (often capped)
Legal, audit, tax, and fund administration fees
Fund-level regulatory filings and compliance costs
Valuation and appraisal fees
Banking, custody, and fund accounting fees
Broken-deal expenses
Portfolio-level third-party costs
These expenses are usually outlined in detail in the LPA and PPM and are shared by the fund’s investors (LPs and the GP to the extent of its capital investment) pro rata.
➡️ What are “GP expenses”?
GP expenses are costs associated with running the sponsor’s business, not the fund.
These are typically paid by the GP or management company and not charged to the fund.
Common GP expenses include:
Principal and employee salaries, bonuses, and benefits
Office rent and overhead
GP-level technology and software
GP-level accounting and tax returns
Legal costs unrelated to fund operations
If the expense exists even without the fund, it’s usually a GP expense.
➡️ Why this line gets blurry
In practice, the line between fund and GP expenses can blur.
Examples of expenses that might be fund expenses or GP expenses include:
Advisers Act compliance costs
Marketing and branding costs
Attending industry events
Placement fees
More and more, LPs insist that the above are considered GP expenses.
➡️ Caps, reimbursements, and approvals
LPs often negotiate:
Caps on organizational expenses
Limits on reimbursable GP expenses
LPAC approval for unusual or non-routine costs
These guardrails protect against shifting GP business overhead onto LPs.
➡️ Disclosure, Disclosure, Disclosure
There is no single “right” allocation, but surprises (or lies) are never acceptable.
LPs and regulators will be very displeased if you don’t follow the rules you set for yourself in the fund documents.
GPs: Be explicit (and honest).
LPs: Read the expense section line by line.
⏩ Next up in Part 25: LP Defaults
Thanks for reading, everyone.
Have a great weekend! 🙌
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