Fee Drag

Definition

Definition Fee drag is the difference between gross performance and what LPs actually receive after fees and expenses. It includes management fees, fund expenses, transaction costs, and carried interest. In private markets, fee drag is often most visible in early years due to the J-curve and the compounding effect of fees over a long holding period. Allocator Context Allocators evaluate fee drag relative to expected value-add and strategy differentiation. Institutions often compare fee drag across peers and assess whether the net return profile is still attractive after all economics. Fee drag becomes more sensitive when expected returns compress, or when strategies behave closer to beta than true alpha. Decision Authority Fee sensitivity can influence IC approval, ticket sizing, and willingness to grant side-letter economics. Some allocators have formal fee policies and thresholds, especially for scalable strategies where operational cost does not justify high fees. Why It Matters for Fundraising Managers win credibility by being precise about economics and net expectations. Avoiding fee discussions or hiding costs creates distrust. Clear articulation of how fees translate into outcomes (and why they are justified) improves close velocity. Key Takeaways Net returns, not gross, drive allocator outcomes Early years amplify fee drag via the J-curve Fee justification must be tied to real value-add Transparency reduces negotiation friction