Basic, lesson 1 of 3
A fund's life, capital calls, and fees
LPs commit money once and pay it in over years as the fund calls it. Fees are charged on a base that usually shrinks after the investment period, and recycling puts some of that fee money back to work.
9 min, 3 checks
1Commitments and calls
When an LP commits 20 million dollars to a fund, it does not wire 20 million on day one. The fund sends capital calls as it makes investments and pays fees, usually over the first four to six years. Money already paid in is called (or contributed) capital; the rest is uncalled.
| Years | Phase | What happens |
|---|---|---|
| 1 to 4 or 5 | Investment period | New companies; most capital is called |
| 4 to 8 | Support | Follow on checks into the companies that are working |
| 7 to 10 and extensions | Harvest | Exits, distributions to LPs, few new checks |
Check 1
An LP commits 20 million dollars. The fund has called 35 percent. How much is still uncalled, in millions?
2Fees, step downs, and recycling
Management fees are often charged on committed capital during the investment period, then on a smaller base (invested capital still held, or a lower rate) afterward. The step down reflects that the GP does less new work later in the fund's life.
Worked example
A 150 million dollar fund
- 1Years 1 to 5: 2 percent of 150 million = 3 million a year, 15 million total.
- 2Years 6 to 10: 1.5 percent of 100 million of invested capital still held = 1.5 million a year, 7.5 million total.
- 3Total fees: 22.5 million, or 15 percent of commitments.
- 4Without recycling the fund can invest 150 - 22.5 = 127.5 million. If it recycles 20 million of early exit proceeds, it can invest 147.5 million.
Recycling lets the fund invest close to the full commitment, so fees are not a permanent drag on the capital at work.
Check 2
An 80 million dollar fund charges 2.5 percent of commitments for four years, then 1.5 percent of 60 million for six years. What are total fees, in millions?
Check 3
Why do LPs accept recycling provisions?
Terms in this lesson: Capital call, Limited partner, Management fee, General partner.
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