Administration is the visible part. Audit, tax compliance and registered office fees are charged per entity, and the small deal vehicles carry a share of the bill out of all proportion to the money they hold.
Add up administration, audit, tax compliance and registered office or director fees entity by entity, then divide by commitments. An illustrative $750m fund with nine entities (main fund, parallel fund, feeder, two AIVs, three blockers and the GP) costs $1,495k a year to run, or 19.9 basis points of commitments. The six small vehicles are 40.8 per cent of that bill, and a blocker set up for one $30m deal costs 1.88 per cent of the investment over a five-year hold.
Worked in full in The Private Markets COO by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Entity costs rarely appear as a line in a fund budget. They arrive as separate invoices from the administrator, the auditor, the tax adviser and the registered office provider, each per entity, and they get approved one structure memo at a time. A COO who adds them up once usually finds the structure costs more than anyone agreed to.
| Entity | Count | Admin | Audit | Tax | Office, regulatory, directors | Per entity | Total |
|---|---|---|---|---|---|---|---|
| Main fund (onshore LP) | 1 | 260 | 95 | 120 | 25 | 500 | 500 |
| Parallel fund (offshore) | 1 | 140 | 70 | 45 | 80 | 335 | 335 |
| Feeder fund | 1 | 45 | 35 | 15 | 20 | 115 | 115 |
| Alternative investment vehicle | 2 | 35 | 30 | 30 | 10 | 105 | 210 |
| Blocker corporation | 3 | 20 | 25 | 40 | 10 | 95 | 285 |
| General partner entity | 1 | 15 | 10 | 20 | 5 | 50 | 50 |
| Structure | 9 | 590 | 345 | 380 | 180 | 1,495 |
Other inputs: cost inflation of 3 per cent a year, a ten-year fund life, $60k to set up an AIV or blocker, and a management fee of 1.75 per cent on commitments.
1. Annual cost. Sum of count × cost per entity = $1,495k. In Excel, with counts in B2:B7 and per-entity costs in G2:G7: =SUMPRODUCT(B2:B7,G2:G7).
2. In basis points. 1,495 ÷ 750,000 × 10,000 = 19.9 bp of commitments. Leaving out the GP entity, which the manager normally pays for, the fund bears $1,445k, or 19.3 bp.
3. Against the fee. The management fee is 1.75% × $750m = $13,125k, so the structure costs 11.4 per cent of it every year.
4. Over the fund's life. At 3 per cent inflation the ten-year factor is 11.4639, so the structure costs 1,495 × 11.4639 = $17.1m, or 2.29 per cent of commitments, if every entity runs for the full term. That is an upper bound: AIVs and blockers usually close when their investment is sold.
Two things stand out. Administration is only 39.5 per cent of the bill; tax compliance and audit together are 48.5 per cent, and they are the lines that scale with the number of entities rather than with assets. And the six small vehicles cost $610k, 40.8 per cent of the total, although they hold a fraction of the money.
A blocker costs $95k a year. Over a five-year hold at 3 per cent inflation the factor is 5.3091, so the running cost is 95 × 5.3091 = 504.4, plus $60k of set-up.
Total: $564.4k on a $30m investment, 1.88 per cent of it, or 38 bp a year.
The management fee attributable to that $30m at 1.75 per cent is $525k a year, so the blocker's run cost alone equals 18.1 per cent of it. An AIV for the same deal costs $617.5k, 2.06 per cent.
A blocker or AIV is usually set up because the tax or regulatory saving is larger than this, and often it is. The point is that the comparison is rarely made on the full figure. Structure memos price the set-up and the first year; dissolution, final audits and five years of tax returns arrive later. To keep a blocker under 10 bp a year of the investment it serves, on these costs the deal needs to be about $112.9m.
| Commitments | Annual cost, bp | Life cost, % of commitments |
|---|---|---|
| $300m | 49.8 | 5.71% |
| $500m | 29.9 | 3.43% |
| $750m | 19.9 | 2.29% |
| $1,000m | 15.0 | 1.71% |
| $1,500m | 10.0 | 1.14% |
| AIVs | Blockers | Entities | Annual cost, $k | bp |
|---|---|---|---|---|
| 0 | 0 | 4 | 1,000 | 13.3 |
| 1 | 1 | 6 | 1,200 | 16.0 |
| 2 | 3 | 9 | 1,495 | 19.9 |
| 3 | 5 | 12 | 1,790 | 23.9 |
| 4 | 8 | 16 | 2,180 | 29.1 |
A $300m fund that copies a large manager's structure pays 49.8 bp a year for it. Deal vehicles accumulate the same way: a fund with four AIVs and eight blockers pays more than twice the cost of its core entities.
The usual error is budgeting the structure from the administrator's quote. The administrator's fees are the visible, negotiated part; audit, tax compliance and registered office fees are billed separately per entity and are larger in total. The second error is judging each new vehicle on its set-up cost. Every entity is a recurring cost to the end of its life, and whether the fund or the manager bears it depends on the LPA's expense definitions, which is where the allocation between a main and a parallel fund and the fund's expense ratio pick it up.
Control point: keep an entity register with an annual run cost and an expected dissolution date for each vehicle, and require every structuring memo to state the cost to dissolution, not the set-up fee.
Here the structure costs $1,495k a year, 19.9 bp of commitments and 11.4 per cent of the management fee, with the small vehicles taking 40.8 per cent of it. A single deal blocker costs 1.88 per cent of a $30m investment. The entity map and vendor register tabs of the free workbook for this case are where these numbers belong.
In the illustrative case $95k a year: $20k of administration, $25k of audit, $40k of tax compliance and $10k of registered office and franchise fees. With $60k of set-up and 3 per cent inflation, one blocker held for five years costs $564.4k, 1.88 per cent of the $30m investment it serves, or 38 basis points a year.
It depends on the LPA's definition of fund expenses. Most entity costs of the fund and its investment vehicles are typically charged to the fund, while the GP entity is usually the manager's cost. In the illustrative structure the fund bears $1,445k of the $1,495k annual total, 19.3 basis points of $750m of commitments.
Because most of them are fixed per entity. The same nine-entity structure costs 19.9 basis points a year on a $750m fund but 49.8 on a $300m fund, and over a ten-year life up to 5.71 per cent of commitments instead of 2.29 per cent, if every entity runs for the full term.
This article is one calculation from The Private Markets COO. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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