Perhaps there are also more nuances to add here? Maybe:
It varies by time. The flat percentage of committed capital approach might be an early or legacy structure? Seems possible given the somewhat dated academic literature showing the flat 2% model and the way this is called the “traditional” structure.
It varies by investment stage: maybe larger funds use the “step-down approach” and first time, smaller, or emerging manager funds use the traditional approach. This is certainly the view of this description, which thinks only larger funds might use the step-down approach. This could be plausible. There is a certain amount of “fixed cost” to managing a fund, and that might be too high to be covered from a percentage of capital deployed if the capital deployed was small. And perhaps larger and later stage VCs have investors comparing them to PE and SBICs, so cannot get away with the flat version that emerging managers can use with their (less sophisticated?) LPs?
It varies by geography: maybe some markets use the step-down approach but others stick with the “classic” version? Maybe institutional investors have more leverage over Silicon Valley funds, and so can force more step-downs, while smaller Southeastern LPs are at the mercy of fund managers on terms? Seems hard to come up with viable theses there, but perhaps there is at least some regional variation?
There are versions that are hybrids – “a bit of both” that complicate descriptions? For example, this post from Greenspring describes a management fee structure of 2.5% of committed capital in years 1-4, 1.875% in years 5 and 6, 1.25% in years 7-10%. We have other examples of this in our southeastern dataset too. Is that a step-down approach? Sort of, but not really.
It remains surprising that these issues are so opaque, the terminology so confused, and the data so lacking that these suggestions are so hard to evaluate.
Over the next few posts we’ll discuss why this might be – and what investors need to consider when evaluating things like this.