Management fees are fees paid from a fund’s assets to the fund manager or adviser for overseeing and managing the fund. In private equity and similar funds, managers typically charge a management fee based on a percentage of either committed capital or invested capital — often something like 1% or 2% annually.

On top of this, managers also earn a performance fee — usually a percentage of profits earned above a set benchmark — commonly called carried interest. For example, a typical fee structure of 2% management fee and 20% performance fee is often referred to as a “2 and 20” arrangement. If you’re researching what are management fees or how private equity fund fees work, understanding this structure is key to knowing how fund managers get paid.

Management Fee, Building Blocks: Private Funds, Building Blocks: Starting a Private Fund