Management Fee Step-Down

Management Fee Step-Downs reduce fees after investment periods end, reflecting a shift from capital deployment to portfolio management.

For allocators, step-downs are a test of economic alignment, not a concession.

How allocators define fee step-down drivers

Allocators evaluate step-downs by:

• Timing: when reductions start relative to deployment completion
• Magnitude: meaningful vs cosmetic reductions
• Fee base: committed vs invested vs NAV-based constructs
• Offsets: transaction/monitoring fees and rebate policies
• Tail economics: harvest period, extensions, wind-down fees
• Consistency: whether economics match actual workload + staffing

Allocator framing:
“Does fee decline track actual effort — or protect GP economics?”

Where step-downs matter most

• long-duration funds and slow-deploying strategies
• strategies with heavy monitoring/workout phases (credit, special sits)
• managers with multiple vehicles where overhead allocation matters
• funds likely to extend beyond term

How step-downs change outcomes

Aligned step-downs:

• improve net outcomes via lower drag
• support trust and re-up likelihood
• reduce “fee fatigue” in later years

Misaligned step-downs:

• signal fee maximization over partnership
• inflate tail-period costs
• increase negotiation friction and slow decisions

How allocators evaluate fee alignment

Conviction increases when managers:

• step down onto invested capital (or another defensible base)
• reduce fees materially after deployment
• disclose offsets and expense allocations transparently
• show how staffing and operating costs evolve post-investment period

What slows allocator decision-making

• minimal reductions labeled as step-downs
• fees staying on committed capital indefinitely
• unclear offsets and expense pass-through logic
• economics that do not match fund lifecycle reality

Common misconceptions

• “Fees drop automatically.” → structures vary widely.
• “Lower fees mean weaker support.” → efficiency and incentives matter.
• “Step-downs are standardized.” → they are highly negotiated.

Key allocator questions during diligence

• When do fees step down and by how much?
• What is the fee base post-investment period?
• What offsets apply and how are they reported?
• What happens in extensions and wind-down periods?
• How do fund expenses change over time?