🎉 Happy Friday, funds family!

This is the fourth in a multi-part series on 💼 Negotiating Co-GP Deals. This week, we’re going to discuss how co-GPs split management fees. 🤤 

🤔 What is the management fee?

The management fee is a recurring fee payable to the Management Company (ManCo). The ManCo is typically (but not always) an affiliate of the GP. For a structure chart showing the interplay between the ManCo and the GP, please see this article on a 💰️ typical fund entity structure. 

The specific amount and timing of the management fee depend on the fund size and the asset class. However, a common management fee percentage is 1.5-2%. The management fee base (the base on which the percentage is applied) might be any of the following:

• Committed capital

• Invested capital

• Net asset value (NAV)

• Assets under management (AUM)

• Gross income attributable to fund investments

For an in-depth breakdown of management fee structures, please see this article: 🛠️ How do you get paid for managing a fund?. 

🧵 How do co-GPs split management fees?

Here’s a surprise for you…in many co-GP deals, the capital provider (the party that is not the operator) doesn’t receive any management fees at all!

Wild card! 🃏 

In a large portion of these deals, the capital provider gets a slice of carry, and gets a preferential side letter, but that’s it. No más.

However, in some cases, the capital provider will indeed get a slice of the management fee (often between 10-49%, but specific deal terms vary considerably).

💵 What are the mechanics for the capital provider to get a share of fees?

There are two main ways to give the capital provider a share of management fees:

1. Admit them into the ManCo. In some cases, the capital provider is admitted as a member (or economic assignee) into the ManCo itself and is treated as a partner for tax purposes. In this case, they would sign the ManCo’s LLC agreement.

2. Rev share contract. In other cases, the ManCo and the capital provider might enter into a separate contract where the ManCo agrees to send a certain percentage of management fee receipts to the capital provider.

🕑️ Vesting of management fees

In most deal structures, management fees are not subject to a vesting structure. If an operator leaves the ManCo, they typically no longer get any right to receive management fees.

As with carried interest, the capital provider’s right to receive management fees is typically fully vested. This is because the fees are earned in exchange for the capital provider investing money, not providing services.

In each case, operators and capital providers might get zeroed out if they commit a cause event like fraud.

👐 What about working capital investments?

In some cases, the capital provider might contribute working capital to the ManCo in exchange for the management fee right. Usually, the working capital amount is significantly smaller than the co-GP’s equity check into the underlying fund. For example, a co-GP might commit $50 million to the underlying fund as a capital commitment and $1 million of working capital to the ManCo. Depending on the circumstances, the ManCo’s LLC agreement might include priority repayment of the $1 million to the capital provider before the operator receives excess management fees.

⚠️ 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.