What does half a point of fee cost the investor?
Management fee down the side, gross return across the top, and the net multiple the investor actually receives in all 49 cells. Half a point of fee costs the investor more than half a point of gross return does.
Finance Intermediate Data Table free
After you install, this is the model to open.
What Fee Does the Fund Need to Clear the Hurdle?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
The answer
- Half a point of fee
- $352,500 of net proceeds on $10M committed, at 12% gross
- Net multiple
- 1.60x to 1.56x moving the fee from 1.5% to 2% a year, same fund
- The full sweep
- $1.06M between a 1% fund and a 2.5% fund at the same gross return
- Same story at every return
- 0.04x to 0.05x what the half point costs from 8% to 20% gross
The number a fund reports and the number an investor receives are different, and this table is about the size of the gap. Two things separate them. The management fee is paid out of the commitment, so at 1.5% a year over five years, $750,000 of the $10M is never invested and the return compounds on $9.25M instead. Then carried interest takes 20% of everything above the preferred return, which over five years at 8% is a threshold of 1.469 times committed capital.
The sheet opens at a 1.5% fee and a 12% gross return: a gross multiple of 1.762 on invested capital, and 1.598 net to the investor. Click Run and the table fills in the net multiple for every fee from 1.0% to 2.5% against every gross return from 8% to 20%. Read down the 12% column: 1.633 at a 1% fee, 1.598 at 1.5%, 1.563 at 2%, 1.528 at 2.5%.
Each half point of annual fee costs about 0.035 of net multiple, which on $10M is $350,000 to the investor. Now read across the 1.5% line: lifting the gross return from 12% to 14% is worth 0.121 of multiple. Divide one by the other and half a point of fee costs the investor roughly what six tenths of a point of gross return is worth, every year, for five years.
That is the honest way to state what a fee is, a permanent handicap on the return rather than a line in the operating budget. The other column worth reading is the 8% one on the left. At an 8% gross return nothing reaches the preferred threshold, so no carry is paid anywhere in that column and the whole gap between gross and net is fee. That is what a preferred return is for, and this is the cleanest place to watch it work.
Run it again with the fund life set to 8 years and the gap between the gross multiple and the net one widens from about 0.164 to about 0.363, because the fee is charged for three more years while the carry threshold compounds too. That is the argument about fee-paying periods most small funds have with their first institutional investor. The model is a single-exit fund with no capital called back, no recycling and no fee step-down after the investment period, all of which real documents contain.
Put your own terms into the assumption block at the top and use it to answer the question an investor asks before they ask anything else.
The model
It arrives on a tab called Template: Fee, Carry and What the Investor Gets, carrying these columns:
- Fee, carry and what the investor gets
with the model computed beside the data:
| Total fees paid ($) | 750,000 |
| Capital actually invested ($) | 9,250,000 |
| Gross proceeds at exit ($) | 16,301,660.6 |
| Profit over committed capital ($) | 6,301,660.6 |
| Preferred return threshold ($) | 4,693,280.8 |
| Profit above the preferred return ($) | 1,608,379.8 |
| Carried interest paid ($) | 321,676 |
| Net proceeds to the investor ($) | 15,979,984.6 |
| Net multiple to the investor | 1.598 |
| Gross multiple on invested capital | 1.762 |
| Multiple lost to fees and carry | 0.1643 |
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
- What gross multiple does the hurdle actually demand?Will the Fund Clear Its Hurdle?
- What does your target return cost you in risk?The Cheapest Way to Hit the Target Return
- Which fund risks are worth paying to cover?What Could Go Wrong in the Fund?
- Simulate five portfolio positions, each with a chance of not surviving the year and a value tied to the same funding market, to see the downside range. Free.What Does a Bad Year Look Like?
- Is that margin gap real or just a wider spread?Do Our Two Service Lines Earn the Same Margin?
- How much cash does a year need before it is safe, not just funded?How much cash gives 95% odds of not running out?
Every model like this one, and the method behind them: What-if analysis in Google Sheets.