Understanding Management Fee

Brandon Tan
Oct 16, 2025
3 min read

Updated: Dec 22, 2025

This guide is a continuation of a series of educational post on fund management. If you would like to find out more about how a fund works, please visit our Expert Guide

One of the most important and fundamental component of a fund is its fee structure that a fund manager charges to its investors. Fee structure varies depending on the fund size, fund strategies as well as the negotiating power of the fund manager.

Fees are important because it aligns fund managers’ interest, ensuring that they are vested and committed to the success of the fund.

There are generally two main fee types to align the risks and rewards of the fund manager:

Management Fee: A predictable fee to cover the fund manager's operational costs.
Carried Interest / Performance Fee: A reward-based fee that serves as the primary wealth driver for successful fund managers.

In this article, we will break down the fundamentals of management fees, explore how it's calculated, and clarify which costs are typically covered by fund managers versus the fund itself.

Whether you're a fund manager, investor, or finance professional, this guide offers practical insights into aligning interests, structuring fees, and ensuring transparency in fund operations.

What is a Management Fee?

As the name implies, a management fee is charged by a fund manager to compensate them for managing the fund's activities. The fees typically covers the operating cost of operating a fund manager, such as salaries, rent, cost of maintaining regulatory licensing requirements, due diligence expenditure as well as compensating the fund manager for expenses relating to deal sourcing, managing portfolio companies, and overseeing fund operations. Essentially, management fee enables the fund manager to operate before realizing any carried interest which typically takes more than five years to materialize.

Accordingly, management fee is usually the highest during the investment phase of the fund, which tapers off once the fund enters the divestment phase. Similar concept applies when the fund manager raises a new fund (eg. the management fees of existing funds will be reduced)

What Costs Are Covered by the Management Fee?

One of the most commonly asked questions is the type of expenses to be covered by the management fee (and thus borne by the fund manager), and which type of expenses can be recharged to the fund entities.

The table below provides a high-level overview of expenses typically covered by management fees versus those incurred by the fund itself. Please note that actual allocations may differ depending on fund terms and negotiations outlined in governance documents (e.g. Limited Partnership Agreements, Subscription Agreements, Private Placement Memorandum).

Cost Covered by Management Fees	Cost Typically Incurred by the Fund
Regulatory expenditures relating to the fund managers (licensing, compliance fee etc)	Regulatory expenditures relating to the Fund entities (AML/KYC sanction screenings, regulatory filing fees etc)
Operational cost of fund managers (salaries, rent, insurance, IT fees etc)	Operational cost of maintaining the Fund entities (company secretary, registered agents, fund administration etc)
Statutory expenditure of fund managers and GPs	Statutory expenditure of the Fund
Deal diligence “DD” expenditures (Travel and entertainment, legal DD, finance DD etc)	Deal transaction expenditures (Travel and entertainment, legal DD, finance DD etc)
Portfolio monitoring tools	Valuation of investments

Determination of whether DD fees can be charged to fund usually depends on various factors such as:

Whether the investment was successfully closed and transacted
Whether the fees are necessary to close the transaction
Whether the due diligence procedures are specifically mandated by the investors
Regulatory requirements (CFIUS review for foreign investments in U.S. businesses etc)

How is the Management Fee Calculated?

The calculation method often changes throughout the fund's lifecycle. The most common approaches are:

Fund Phase	Typical Fee Calculation Method
Investment Period	Fee charged based on committed capital (generally 1.0% - 2.5%)
Post-Investment Period (Divestment)	Fee charged based on committed capital; or Fee charged based on invested capital; or Fee charged based on lower of invested capital or fair value of investments; or Annual step-down fee (eg. annually reduce by 0.5%)
Fund Extension Phase	First year extension - step down fee; and Second year extension – typically no fees charged
Fund reduction due to subsequent new fund launches	Reduced fee based on pre-agreed fund terms

Frequency of Management Fee Payment

Management fee is typically computed on a quarterly basis and charged in advance or arrears.

Where management fees are charged based on invested capital or fair value, an adjustment (also known as “true-up”) will be required if the fees are paid in advance. This ensures that any overpayment or underpayment of management fees is properly adjusted for based on the investment transactions occurring during the quarter, and/or quarter end investment valuations.

Navigate Fund Fees with Confidence

While this guide outlines the fundamentals, every fund is unique. Kai Global Consulting's experts provide tailored advice on fee structuring, cost allocation, and LP agreement terms to ensure your fund's setup is both competitive and sustainable.