FEE VALIDATION AND BENCHMARKING IN PRIVATE MARKET FUNDS

Over the past decade, private markets have made meaningful progress toward transparency. Improved reporting standards and more consistent data disclosure have helped Limited Partners (LPs) become better informed about the funds they invest in.
At the same time, fundraising headwinds have shifted negotiating power, with General Partners (GPs) increasingly making concessions on fees and terms to meet their targets—an encouraging trend, as noted in Preqin’s Investor Survey (November 2024).
But even as institutional investors begin to benefit from more favorable fund terms, and better disclosure of fee data in the ongoing reporting, a fundamental challenge remains: more data doesn’t always lead to increased confidence and clarity in fund charges.
LPs continue to grapple with fee structures that have grown more complex, more nuanced, and, in many cases, harder to decode—making true fee validation more important than ever.

WHEN DOES MORE DISCLOSURE FAIL TO HELP LPS?

More disclosure isn’t always more useful—especially when it lacks the granularity needed to reveal how fees are actually applied. A prime example is management fee offsets.
While many funds report offsets at a fund level, the critical question is whether these amounts are tracked at the LP level. In our view, they should be tracked at the LP level, particularly because LPs often pay different management fee rates within the same fund. When offsets are tracked only at the fund level and excess amounts are distributed based on ownership percentages, some LPs may unknowingly subsidize others.
These disparities can translate into millions of dollars in missed reimbursements or overpayments. Tools like the ILPA Fee Template are designed to address this issue, but they’re only effective when fully and consistently implemented.

WHY DO THE DEFINITIONS IN LPAS MATTER WHEN IT COMES TO FEES?

The way terms are defined in Limited Partnership Agreements (LPAs) has a direct and often material impact on how fees are calculated and applied. As we often say, “lawyers negotiate the language, but it’s up to the accountants and administrators to turn it into math.” When that language is open to interpretation, ensuring the math is accurate becomes a complex task. For example, carried interest may be allocated based on Gross Gains—which exclude deductions for management fees and expenses—instead of the more typical Net Gains basis. This distinction can significantly shift the economics over the life of a fund.
Similarly, management fee structures may use definitions like “Invested Capital” that include not only the cost basis of portfolio investments but also previously paid fees, effectively compounding the fee base. These differences often hinge on subtle language choices in the LPA, making it critical for LPs to carefully review and understand how definitions shape the financial terms of their commitments.

WHAT ARE NUANCES IN FUND TERMS THAT CAN SIGNIFICANTLY IMPACT FEES?

One area that often flies under the radar is the structure of multi-tiered or multi-component management fees. These fee arrangements can be particularly nuanced, and the longer and more complex they are in the LPA, the more room there is for ambiguity. In practice, it's essential to recalculate each component independently to verify that the fee terms are being properly applied.
For example, Real Estate funds may define three distinct components that make up the management fee base. The specific definitions—and the rules that dictate when one component supersedes another—are critical. Even when applied exactly as outlined, these structures can lead to fee bases that significantly exceed the total committed capital of the fund, sometimes persisting well beyond the investment period. These structural subtleties can materially alter the economics for LPs so should be carefully understood and monitored.

WHAT CAN LPS DO TO STRENGTHEN THEIR OVERSIGHT OF FUND FEES AND TERMS?

LPs can take a more proactive and structured approach to how they monitor and evaluate fund economics. This begins with breaking down the full fee stack—clearly distinguishing between management fees, carried interest, and fund expenses—to better understand the true cost of their commitments. Oversight should be continuous, not limited to sporadic reconciliations.
Fees should be monitored regularly, as calculations can shift from quarter to quarter. LPs should also bridge the gap between legal documents and financial outcomes, ensuring that what's written in the LPA or side letters accurately translates into how fees are applied in practice.
Leveraging technology to track fee offsets at the LP level is another critical step, particularly as fee structures become more individualized and nuanced. Benchmarking fund terms against market norms is equally important—not to compare fees in relation to performance, but to detect structural outliers that may stem from miscalculations or misinterpretations of the LPA. 
While greater transparency in fund data is a meaningful step forward for LPs aiming to build effective portfolios, it doesn't fully resolve the complexity and opacity that still surrounds private market fee structures. To maintain accuracy and ensure true transparency, LPs need to implement a robust, ongoing process to monitor and validate their fees. At eFront, we support this effort through our fee diligence solution, FAIR. This service provides standardized, validated fee data, enabling LPs to benchmark their fees and gain strategic clarity. With FAIR, LPs are better equipped to assess their true costs, ensure compliance with agreed terms, and engage in more informed negotiations.