Fee and Expense Allocation

Fee and Expense Allocation describes how management fees are calculated, what expenses the fund can bear, how broken-deal costs are treated, how affiliates are paid, and how costs are allocated across funds, parallel vehicles, co-invests, SPVs, and special arrangements.

From an allocator perspective, this is one of the highest-signal governance areas because it directly reflects alignment. Clean funds define expenses narrowly and transparently. Messy funds preserve optionality and let ambiguity become economics.

How allocators define fee/expense risk drivers

Allocators evaluate:

• Management fee base: committed vs invested vs NAV; step-down terms
• Chargeable expenses: travel, diligence, legal, admin, expert networks, etc.
• Broken-deal treatment: what gets allocated and how consistently
• Affiliate and related-party costs: monitoring fees, consulting, services
• Co-invest expense allocation: who pays deal costs and ongoing costs
• Allocation across vehicles: parallel funds, SPVs, sleeves
• Disclosure and reporting: itemization, controls, and auditability

Allocator framing:
“Are economics clean and transparent—or is ambiguity being used to shift costs to LPs?”

Where fee/expense allocation matters most

• multi-vehicle platforms and parallel funds
• managers using affiliates and operating partner structures
• strategies with frequent deal activity (high broken-deal risk)
• LP bases that include institutions with strict expense policies

How allocation rules change outcomes

Strong allocation discipline:

• improves trust and reduces legal friction
• decreases side letter complexity
• reduces dispute risk and reputational damage
• supports faster approvals and better re-up dynamics

Weak allocation discipline:

• creates late-stage negotiation and MFN contagion
• increases conflicts and perception of “hidden fees”
• triggers ODD and IC discomfort
• can damage fundraising even if performance is strong

How allocators evaluate discipline

Conviction increases when managers:

• define chargeable expenses clearly and narrowly
• provide reporting itemization and audit-ready controls
• disclose affiliate economics transparently
• show consistent policies across vehicles and deals

What slows allocator decision-making

• broad “fund pays all expenses” language
• unclear affiliate and monitoring fee policies
• inconsistent co-invest expense allocation
• weak reporting or inability to show historical expense patterns

Common misconceptions

• “Fees are just management + carry” → expenses can be meaningful hidden economics.
• “Everyone does it” → top allocators differentiate on cleanliness and transparency.
• “Side letters can fix it” → side letters increase complexity and MFN risk.

Key allocator questions during diligence

• What is chargeable vs non-chargeable, and how is it controlled?
• How are broken-deal expenses allocated?
• What affiliate economics exist and how are they disclosed?
• How are co-invest costs allocated to LPs vs the manager?
• Can you provide historical expense reporting examples?