The all-in cost of a private-market fund has four layers: manager compensation, fund operating costs, distribution and intermediary costs, and financing costs on fund borrowings. SEC fee tables report most of these as separate lines, but performance fees and interest expense require adjustment before two funds can be compared on cost.
What are the four cost layers of a private-market fund?
The four cost layers are manager compensation, fund operating costs, distribution and intermediary costs, and financing costs.
Registered funds already report most of these layers in a standard format. Form N-2, the SEC registration form for closed-end funds, interval funds, and business development companies (BDCs), lists management fees, interest on borrowings, other expenses, and underlying-fund expenses as separate lines in the fee table and expresses each as a percentage of shareholders’ net assets.1 Private funds file no comparable fee table, so for a limited partnership the same four layers must be assembled from the partnership agreement and quarterly reporting.
What does a private-market fund pay its manager?
Manager compensation has two parts: a base management fee charged on an asset base and a performance fee charged on results. In private equity and venture capital partnerships, the performance fee is carried interest. In BDCs and credit funds, it is usually an incentive fee on net investment income, with a separate fee on realized capital gains. The base fee is owed regardless of results; the performance fee rises and falls with them, which is why the two need to be evaluated together.
The fee table of a registered fund can understate what investors will pay. When a fund has a performance fee arrangement, Form N-2 instructs it to include only the base fee in the table, and a BDC may instead describe its incentive fee in separate disclosure.1 For an advisory firm, the total annual expenses line of a fund with a performance fee is a starting point rather than a total, and the incentive terms must be read alongside it.
The incentive fee can be a substantial share of what a credit fund pays its manager. A non-traded private credit BDC, for example, charges a 1.25% annual management fee on net asset value, plus 12.5% of net investment income above a 5% hurdle rate with a catch-up, and 12.5% of realized gains, net of realized and unrealized losses.2 A comparison based solely on the management fee would omit the component that increases as the fund’s income rises.
In private equity, fixed fees do most of the work. In a study of 238 funds raised between 1993 and 2006, Metrick and Yasuda found that about two-thirds of expected manager revenue came from components that do not depend on performance.3 The base fee and the asset base it is charged against therefore deserve at least as much diligence as the carried interest terms, because they account for most of what a manager expects to collect.
For private funds, the closest equivalent to a fee table is the Institutional Limited Partners Association’s Reporting Template, updated in January 2025. It reports management fees both before and after offsets, waivers, and rebates, and separates expenses paid to the adviser or its related persons from third-party partnership expenses.4 The net figure shows what investors actually bore, and the related-party line shows how much of the expense layer was returned to the manager’s own organization.
Why does the fee base matter as much as the fee rate?
Two funds with the same stated management fee can cost shareholders different amounts, depending on what the fee is charged against. The SEC’s investor bulletin on publicly traded BDCs notes that advisory fees are generally 1.5% to 2% of a fund’s gross assets, plus incentive fees generally up to 20% of profits.5 Gross assets include assets bought with borrowed money, so shareholders pay a fee on capital they did not contribute.
A publicly traded BDC illustrates how the structure works in practice. Its adviser charges 1.5% on assets financed with leverage up to 1.0x debt-to-equity and 1.0% on assets financed above that level, based on total assets other than cash, including assets purchased with borrowed funds.6 The step-down above 1.0x reduces the rate on additional borrowing, but the fee base still grows with every dollar borrowed.
Measured against the equity shareholders’ ownership, BDCs’ base management fee came to 3.03% of average net assets for 2024, roughly double its 1.5% headline rate.7 The more a fund borrows, the wider the gap between the quoted rate and the cost to shareholders becomes.
What operating costs does a fund pass through to investors?
The operating layer is easy to underweight because it is spread across many small items. Form N-2 consolidates them into two lines: Other Expenses, which covers all deductions from fund assets not reported elsewhere in the table, and Acquired Fund Fees and Expenses, which covers costs the fund bears through investments in other funds.1 That second line includes private funds that rely on the Section 3(c)(1) or 3(c)(7) exclusions of the Investment Company Act.
For a fund that invests in private funds, the underlying-fund line can understate what the underlying managers are paid. Form N-2 includes incentive allocations in Acquired Fund Fees and Expenses but excludes performance fees calculated solely on realized or distributed gains, which typically describe carried interest, and requires only a footnote stating the typical rate.1 An advisory firm evaluating a fund of private funds needs that footnote, not just the line, to see the full cost of the managers beneath it.
Expense support can make a newer fund’s operating costs appear lower than they will remain. A continuously offered BDC, for instance, describes a voluntary arrangement under which its adviser may pay certain expenses, including organization and offering costs, and later be reimbursed by the fund, and states that its fee table does not reflect that support.2 The reimbursement terms determine whether a lower expense figure today is a reduction or a deferral.
Fund size also shapes the operating layer because fixed costs such as audit, legal, and administration are spread across the asset base. One interval fund based the fee table in its 2022 launch prospectus on estimated first-year net assets of $50 million and showed Other Expenses of 1.10%.8
An interval fund launched in 2022 reported Other Expenses of 0.72% in its March 2025 prospectus supplement, once it had an operating history to report against.9 A first-year fee table is a projection, and how closely actual costs track it depends on how quickly the fund reaches the asset base it assumed.
How do share classes and access channels change what an investor pays?
Distribution costs reflect how shares are sold rather than what the fund owns, making this the layer an advisory firm has the most direct control over. Form N-2 requires the fee table example, which shows the dollar cost of a $1,000 investment over one, three, five, and ten years, to include all recurring and nonrecurring fees, including underwriting discounts and commissions.1 The example is therefore a direct way to see how a share class’s distribution costs accumulate over a holding period.
A perpetually offered credit BDC sold in three share classes illustrates how wide the range can be, with every class holding the same portfolio. Class I, sold through fee-based programs and registered investment advisers, carries no upfront placement fee and no servicing fee; Class D carries up to 1.5% upfront and 0.25% a year; Class S, sold through brokerage accounts, carries up to 3.5% upfront and 0.85% a year. Class S total annual expenses were 7.92%, compared with 7.07% for Class I.2 For identical underlying exposure, the difference lies entirely in the share class selected.
Distribution charges on these programs are capped over the life of an offering rather than on a year-by-year basis. FINRA limits underwriting compensation from all sources to 10% of gross offering proceeds, with a 15% cap on total organization and offering expenses.10 Because the cap is measured against the offering as a whole, it limits the cumulative cost of distribution rather than the cost in any single year.
Ongoing servicing fees end once the cap is reached. A 2020 application for SEC multi-class relief, filed by a BDC that offers several share classes, states that shares paying servicing or distribution fees convert to a class without those fees when they reach the sales charge cap set under FINRA Rule 2310.11. The fee is finite, but an investor who exits before conversion bears it for the entire holding period.
Feeder structures add a second layer of fees on top of the underlying fund’s fees. When a registered feeder fund invests in a registered master fund, Form N-2 requires the feeder to report the combined expenses of both funds in Acquired Fund Fees and Expenses.1 For registered feeders, the cost of the extra layer is visible in a single line.
Private feeder vehicles used to reach institutional funds are not registered and do not file a Form N-2 fee table. Their fees appear in their own offering documents, separate from the fees of the fund they invest in, so the two layers must be added together by whoever is comparing the cost.
How much of a BDC’s expense ratio is interest on borrowings?
Interest on borrowings has its own fee table line, and the way it is measured magnifies its size. Form N-2 defines Interest Payments on Borrowed Funds as all interest paid on loans, bonds, and other debt, stated as a percentage of net assets attributable to common shares rather than of the debt itself.1 A fund that borrows more shows a higher interest line even at the same borrowing rate because the same equity base carries more debt.
The room for that line to grow widened in 2018. The Small Business Credit Availability Act reduced the asset coverage requirement for BDCs from 200% to 150% when certain approval and disclosure requirements are met, allowing roughly two dollars of debt per dollar of equity rather than one.12 BDCs that adopted the lower requirement can carry more debt, and with it a larger interest line, than the prior limit allowed.
For a levered credit fund, interest can outweigh all fees combined. In a levered private credit BDC, Class I total annual expenses were 7.07% in 2025, of which 2.82% were excluded interest, so interest accounted for 4.25 percentage points, about 60% of the total. The fund’s disclosure notes that leverage can enhance returns that exceed its cost of funds and will diminish returns or increase losses when returns fall short of that cost.2
The interest line also changes from year to year, even when fee terms do not. For a publicly traded BDC, interest and credit facility fees rose from 4.54% of average net assets in 2020 to 5.79% in 2024.7 A single year’s figure reflects the borrowing in place that year, not a fixed cost of the fund.
How do advisory firms compare all-in cost across private-market funds?
A consistent comparison starts with the fee table in the prospectus for registered funds and with the limited partnership agreement, offering memorandum, and quarterly reporting for private funds. Marketing summaries often present a single layer, usually the base management fee, which is an incomplete figure on its own.
From there, the comparison separates interest expense from the other three layers, adds back any performance fee the fee table assumes away, converts fees charged on gross assets to a net-asset basis, and uses the share class the client will actually hold, including any upfront placement fee. Each adjustment removes a difference that stems from how a cost is reported rather than from what it is.
Newer funds require two additional checks: whether Other Expenses are based on estimated assets and whether an expense support or reimbursement arrangement applies. Feeder access requires one more: the feeder’s own fees recorded alongside the underlying funds.
Cost is one factor among several. Private-market funds also carry risks of capital loss, limited liquidity, and valuation uncertainty, and a lower-cost fund is not necessarily the better fit for a given client. Fee table figures are estimates, and actual expenses may be higher or lower.
About BIP Capital
BIP Capital is an SEC-registered investment adviser headquartered in Atlanta, Georgia, serving registered investment advisers and family offices with private equity and private credit strategies. BIP Capital and its affiliates sponsor private market investment vehicles, including evergreen structures and business development companies of the kind described in this article. BIP Ventures refers to the venture and growth equity activities of BIP Capital and its affiliates. LAGO Asset Management serves as manager and originator of LAGO-branded private credit strategies, for which BIP Capital serves as platform and distributor. Registration with the SEC does not imply a certain level of skill or training.
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