Step-Down
A step-down is a scheduled reduction in management fees and/or a change in fee basis, typically after the investment period.
Allocator relevance: High — a core investor protection mechanic that should align fees with declining workload and realized capital.
Expanded Definition
Step-downs can reduce the fee rate, change the basis (committed → invested → NAV), or both. The true economic effect depends on definitions: whether invested capital excludes written-off deals, how realizations reduce the base, and whether fund extensions preserve higher fee economics. Allocators evaluate whether the step-down meaningfully reduces fees or merely reshapes them.
Decision Authority & Governance
Governance lives in LPA clarity: trigger date, basis definitions, treatment of extensions, and disclosure. Allocators often compare step-down design across a GP’s vintages to detect “economic creep.”
Common Misconceptions
- Step-down always reduces total fees materially.
- Step-down starts at a standard year (e.g., year 5).
- Extensions don’t affect economics.
Key Takeaways
- Step-down design determines real investor friendliness.
- Basis change can offset headline rate reductions.
- Extensions must be modeled explicitly.