How big a difference does the “management fee base” make?
Obviously the best analysis of this question would look at results: do funds with a step-down fee base approach outperform other management fee bases, on a net (DPI) cash basis? Maybe great managers can provide better net returns despite flat fees just because their investing skills are so much better? I don’t think there’s data to tell us.
So instead let’s look briefly at the math from the “front end” of a fund:
2% fee on committed capital for a fund for 10 years = 20% “total load” (2% * 10 years). On a $10M fund, that’s $2 million.
2% fee on a step-down approach is harder to calculate, because it depends on the length of the investment period and the time to reach exits for the portfolio. Let’s take a hypothetical example of a 3-year deployment and linear decline in assets of a $10M fund. The fee there is $1.23 million, equivalent to a 12.3% “total load” –> and $770,000 lower than the flat fee way.
Note that even if it takes longer to deploy and / or more capital stays outstanding longer, the very most the step-down approach could cost is 20% full load – same as the committed fee approach.
How big a difference is this? Again, it depends on the performance of the fund, but, for median / marginal performers, $770,000 in a $10M fund makes a material difference to net investor ROI.
This stuff matters.