12 Management Fees The management fee should be based on reasonable expenses related to the normal operating costs of the fund. The rationale for the management fee should be apparent to LPs, as excessive fees create a misalign- ment of interests. During the formation of a new fund, GPs should provide LPs considering an investment in the fund with a fee model to guide how management fees will be calculated over the life of the fund. Management fees paid or payable to the fund should be disclosed together with the basis of the calculation. In some cases, such as with first time funds or funds with a higher than average management fee, the GP should provide a budget that lays out the rationale for the management fee proposed. Overhead costs, salaries of the GP’s employees and any relevant advisers or affiliates, travel and other costs related to the investment activities of manager on behalf of the partnership should be borne by the manager under the management fee, rather than allocated to the fund. Examples include: • Industry conferences, cost of research and informa- tion services, computer software and subscriptions, travel, entertainment, lodging/accommodations, investment consultants; • Costs and expenses associated with maintenance of required books and records, expenses incurred in fulfilling regulatory compliance requirements, e.g., registration or maintenance of registration; • Costs and expenses associated with any remedial actions required as the result of a regulatory exam (e.g.; SEC audit); • Office space, furniture, computers, telephones, facilities, utilities, and communications. For multiple-product firms, carried interest and fees generated by the GP of a fund should be directed predominantly to the professional staff and expenses related to the success of that fund. Management fees should take into account the low- er levels of expenses incidental to the formation of a follow-on fund, at the end of the investment period, or if a fund’s term is extended. Management fees should step down significantly in each of the circum- stances noted above. Where a GP has agreed to a fee cap for a single investor or group of investors, any amount above the agreed upon cap must be absorbed by the GP and not included in the calculation of the management fee as a percentage of assets allocated to the remaining investors. Basis for the Management Fee When considering the basis for the calculation of the management fee, the following guidelines should be considered: • During the investment period, GPs should determine the appropriateness of a commitment- based fee relative to operating costs and external market dynamics. GPs and LPs may wish to consider the relative merits of a bifurcated fee during the investment period, reflecting an appropriate blended percentage of the amount of capital committed and invested. • Following the end of the investment period, the management fee should step down to a percent- age of unrealized cost. • To ensure that fee streams closely mirror the actual allocation of resources, GPs managing one or more predecessor funds should consider basing the initial management fees for any follow-on fund on invested rather than committed capital. • For GPs utilizing subscription lines of credit to fund management fees, fund expenses and initial invest- ments early in the life of the fund, the methodology by which amounts drawn from the facility but not yet called from investors will be accounted for in calculating the basis for management fees should be transparent and consistent. • The term of the investment period should be clearly and appropriately defined in the fund documents, to avoid ambiguities that may unnecessarily prolong the investment period and result in excessive management fees being charged to the partnership. • During a fund extension, no fees should be charged unless and until LPs agree to such fees on the basis of the facts and circumstances related to maximiz- ing the value of and liquidating any remaining assets. GP AND FUND ECONOMICS