Fee Bearing Capital

Fee bearing capital is the capital in a managed vehicle that entitles its manager to fee revenue. The fund documents set the base, which can be committed capital while the fund is investing and invested capital afterward. Investor money sitting in a fund and money generating fees can therefore be very different amounts.

What the term counts and what it leaves out

Fee bearing capital is a fee base. It tracks the capital on which a manager is entitled to charge, and it is separate from cash on hand, from asset value and from the equity currently deployed.

One large alternative manager defines it as committed capital and invested capital in its managed vehicles that entitle it to fee revenue, and the definition covers both called and uncalled amounts. A commitment that has not been drawn can therefore sit inside the total, provided the documents attach a fee to it.

Term matters because a fee base only pays while the vehicle lives. The same manager reports that most of its fee bearing capital is long-dated or perpetual, and that its long-term private funds are typically committed for 10 years plus two one-year extensions.

How the fee base moves when the investment period ends

The base usually changes at a defined point. One disclosed fee schedule for finance funds sets the annual management fee at 1.8% of total committed capital during the investment period, and afterward the base generally moves to net equity invested.

The same dollar of investor commitment therefore earns fees on day one and may earn nothing once the asset behind it is sold and the proceeds are distributed. The percentage rate can stay put while the fee falls, because the denominator has changed.

A large manager reported exactly this effect. A flagship fund moved its fee base from committed capital to invested capital when its commitment period ended, and that shift pulled down the manager’s fee bearing capital for its long-term private funds.

“During a Finance Fund’s investment period, the aggregate annual Management Fee is generally equal to 1.8% of such Finance Fund’s total committed capital, as defined in the applicable Governing Fund Documents.”

Uncalled commitments and the revenue they have not yet produced

Uncalled commitments are the clearest gap between capital raised and capital paying fees. One manager reported about $47 billion of uncalled commitments that were not earning fees, and said that investing them would add about $470 million of fee revenue.

The ratio of those two figures is about 1%. That ratio is a forecast for one manager’s mix of vehicles, so it describes how that portfolio would convert and carries no weight as a general rate.

For a fund investor the same mechanics apply at smaller scale. Whether the undrawn portion of a commitment carries a fee depends on the base in the documents, and the answer can differ between two funds of identical size.

Why the total can fall while a manager keeps raising money

Fee bearing capital is a stock, and inflows are only one of the forces acting on it. One manager’s long-term private funds saw the measure fall by $468 million, or 1%, to $39 billion over a year, because a mature flagship fund’s fee period expired and investors received distributions. Those losses were partly offset by $4.4 billion of inflows.

Real estate showed the same pattern. The measure for that segment fell 2% in the same year, mainly on distributions and the flagship base change. In a later year it rose by $185 million, as fundraising and deployment outweighed distributions and lower valuations.

Scale can still grow quickly. The same manager reported raising $22 billion in one quarter and $97 billion over the trailing twelve months, with total fee bearing capital reaching $563 billion. A veteran reading those totals separates new commitments from the run-off of older funds, since each hits the measure through a different mechanism.

Worked example: a $200 million fund moving from commitments to invested capital

The inputs are hypothetical. A real estate fund holds $200 million of commitments and charges 1.5% a year. During the investment period the fee base is committed capital, and afterward it is net equity invested.

Base case. During the investment period, the annual fee is $200 million multiplied by 1.5%, which is $3 million. After the period ends, assume the fund has $140 million of net equity invested. The annual fee is $140 million multiplied by 1.5%, which is $2.1 million. The fee falls by $900,000, which is 30% of the original fee, and fee bearing capital falls by $60 million, also 30%.

Stressed case. Assume the same fund has sold more assets and returned capital, leaving $90 million of net equity invested. The annual fee is $90 million multiplied by 1.5%, which is $1.35 million. The fee is $1.65 million below the investment period level, a 55% drop, and fee bearing capital is down $110 million, also 55%.

Same fund, same rate, same commitments. The fee moves in step with the base, which is why the percentage drop in fees equals the percentage drop in fee bearing capital in both cases.

Mistakes in reading fee bearing capital figures

Treating every committed dollar as fee generating overstates the current base. Uncalled commitments can sit outside the fee base, as the gap between uncalled commitments and fee revenue shows, so the definition in the documents decides how much of a commitment pays.

Reading a decline as a loss of assets confuses a change in the fee base with asset movement. When a fund’s base moves from commitments to invested capital, the measure can fall while the same assets remain in the vehicle.

Multiplying a headline capital total by a single rate gives a number that belongs to no particular fund. Each vehicle has its own rate and its own base at its own stage, and a fee schedule such as 1.8% of commitments in the investment period applies only to that phase.

Equating the measure with realized revenue skips rate and timing. A forecast of added fee revenue from deploying uncalled commitments is an estimate tied to future deployment, and it earns nothing until the capital is invested.

Comparing two managers’ totals as if they share a definition ignores that the term is set by each manager. A figure that counts uncalled amounts is built differently from one that counts only invested capital.

Questions that test a fee bearing capital figure

Which base does the fee apply to in each phase of the fund? The documents name committed capital, invested capital or another defined base, and the answer can differ between the investment period and the harvest period.

Are uncalled commitments inside the figure? A definition that counts called and uncalled amounts gives a larger total than one counting only drawn capital.

When does the base change? An end to the commitment period can move the calculation from commitments to net equity invested.

How do distributions enter the later base? Returned capital can reduce net equity invested, and with it the fee.

Does the number describe capital or revenue? Capital is the base, and revenue also depends on the rate and on timing.

Is the stated fee uplift a result or an estimate? A figure for fee revenue from investing uncalled commitments is a forecast until the capital is deployed.

What is the remaining term of the vehicle? A fund committed for 10 years plus two one-year extensions earns fees over a defined life, while a perpetual vehicle has no end date.