Fund formation and first-time fund managers
What management fee and carry should a new fund charge?
Short answer
There is no single right number. The old standard was a 2% management fee and 20% carry, but today many managers charge closer to 1.5 or 1.25 and 20. If you are a small team with a short track record, I would price below the standard and use that as an advantage. Many managers talk to a securities attorney about their terms.
Most new managers copy whatever the big funds charge. I think that is a missed chance. Fees are one of the few parts of your offer you fully control, so they should work for you.
Where the industry standard sits today
When one of our guests started in the business, the norm was one and 20. That means a 1% management fee and a 20% incentive fee. Over time it moved up to two and 20. Then investors pushed back. The same guest told us about losing a $75 million investment from Duke University because a manager moved from one and 20 to two and 20 and the investor walked.
Today fee pressure is real. Our guest said it is more accurate to think of one and a half and 20, or even one and a quarter and 20. He only takes on two and 20 managers who have proven they can return 30 to 50%. He also mentioned founders fees for people starting a fund.
This clip covers how fees have shifted from one and 20 to two and 20 and back toward more realistic levels.
Summary and key takeaways from this video
Why a small team should not charge full price
I talk about this at our events. If your team is two or three people, you have less than a seven year track record and you have done fewer than a dozen deals, you may not be at the level of development that standard fees assume. Many investors see it that way.
"So I wouldn't charge industry standard fees. I would charge something that gives you an advantage."
The same goes for focus. The smaller you are, the narrower you should be. A three person team that buys hospitality in one small area is more believable than one claiming five states.
Here I explain why smaller managers should focus tightly and build structures that are better thought out than what everyone else uses.
Summary and key takeaways from this video
Low fees can raise more money
One member of the Family Office Club has raised over a billion dollars in AUM in the past two years with very lean fees. Their own investors have asked them to charge at least a 10% performance fee. The investors said they would happily pay it. The manager said no, because they did not want to stop raising $200 million a year. It is about the value, not the fee, and investors respond to a long term approach.
Fees are also not the only lever. At our events you will hear about performance only structures, GP commitments, systematic LP contributions, JV equity, anchor investors, different share classes, and sometimes no fees at all.
How to pick your starting point
- Look at what others in your niche charge and ask what would make yours clearly better.
- Be honest about your track record, team size and number of deals.
- Consider a founders fee or an anchor investor class for your first investors.
- Keep in mind that raising fees later can be harder than starting lower.
Many managers talk to a securities attorney about their proposed numbers before using them in any offering materials.
Key facts
- A manager moving from one and 20 to two and 20 cost one guest a $75 million investment from Duke University.
- A Family Office Club member with very lean fees raised over a billion dollars in AUM in two years and keeps raising about $200 million a year.
- I say a team of two to three people with under seven years of track record and fewer than a dozen deals should not charge industry standard fees.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: 10 Advanced Capital Raising Strategies That Took Raising $1 Billion + 10+ Years to Find Out, Capital Raising Frequently Asked Questions Webinar. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around fund fee terms, offering documents and partnership agreements. Do not use AI to write your own legal agreements.
Your next steps
- List what comparable funds in your niche charge.
- Rate your team size, track record and deal count honestly.
- Draft two fee options, one standard and one below it.
- Ask a few target investors which they would choose.
- Talk through the final terms with a securities attorney.
Follow-up questions
Is two and 20 still the standard?
It is still the number people quote. In practice one of our guests said it is more accurate to think of one and a half and 20 or one and a quarter and 20 for many managers.
What is a founders fee?
It is a reduced fee offered to early investors in a new fund. One of our guests suggested emerging managers consider it when starting up.
Can a manager with low fees still raise a lot?
Yes. A member of ours raised over a billion dollars in AUM in two years with very lean fees. Their investors even offered to pay more.
Related questions
- How much capital do I need for a first close?There is no single number.
- What is an SPV and when should I use one?An SPV, or special purpose vehicle, is a separate entity formed to hold one investment, with investors pooled into it.
- Do I need a fund administrator for a small fund?Often not on day one, but plan on it early.
- How do hurdle rates and catch-up work in a fund?A hurdle rate is the minimum return investors receive before the manager shares in profits.
Work through it with the ready to raise checklist. See all fund formation and first-time fund managers resources.