Fee Offset
A fee offset is a mechanism that credits certain fees earned by the GP (e.g., transaction or monitoring fees) back to the fund or LPs, reducing overall fee burden.
Allocator relevance: Reduces fee drag and is a key indicator of economic fairness and transparency in GP compensation.
Expanded Definition
In some strategies, GPs or affiliates may earn additional fees from portfolio companies. Fee offsets determine how much of those fees reduce management fees or otherwise benefit LPs. Offsets vary widely (e.g., 50% vs 100%) and can materially affect net returns—especially in strategies with high transaction volume.
For allocators, fee offsets are a diligence and terms issue: what fees exist, who earns them, how they are disclosed, and what percentage is offset.
How It Works in Practice
Offsets are disclosed in fund documents and reflected in reporting. Allocators review policies to ensure offsets are consistently applied and not diluted by affiliate arrangements or ambiguous expense definitions.
Decision Authority and Governance
LPAC oversight and audit processes often support enforcement. Side letters can be used to clarify offset treatment for specific LPs or to increase transparency.
Common Misconceptions
- Fee offsets always equal 100%.
- Fee offsets eliminate conflicts around additional fees.
- Offsets are too small to matter.
Key Takeaways
- Offsets vary and should be modeled into net returns.
- Disclosure and enforceability matter as much as the percentage.
- Offsets are a trust signal in fee design.