Authored By: Scott Siemens and Michael C. Aronstein, Antiquity

While most investors grasp the basics of management fees (the steady operational charge) and performance fees (the reward for outperformance), the real intrigue lies in the layers beneath – the fine print, the variations, and the subtle mechanisms that can have a substantial impact on returns to the investor. Consider, for instance, fees levied on gross (inclusive of fund leverage) rather than net assets, hard dollar performance fees drawn from unrealized "paper" gains, or protective clauses like high watermarks that determine when such fees truly apply – these elements, among others, introduce complexities that we will explore throughout the Understand Fee’s article series.

This checklist distills those insights into a practical tool for your due diligence process. Think of it as your systematic guide through the fine print, from management fee calculations on gross versus net assets, to performance incentives with their watermarks and clawbacks, to the often-overlooked operational expenses that add up over time. Use it when evaluating fund opportunities, benchmark against peers, and assess whether the economics truly align with your interests or simply extract costs over the fund's indefinite lifespan.

Investor Checklist: Key Fee Considerations

  1. Management Fee Basis: Examine whether fees are calculated on gross assets (including leverage) or net assets; prefer net if leverage risks aren't adequately compensated, and calculate the effective cost using examples from the prospectus to gauge impact on returns. Check out this blog post, where we dive deeper on management fees.
  2. Management Fee Rates and Structures: Review the annual rate (0.5-2%) and check for tiered scales that reduce with growing AUM or fixed rates; compare to market benchmarks and assess alignment with liquidity levels and services provided.
  3. Performance Fee Triggers: Determine if fees apply to realized gains only or include unrealized "paper" profits from quarterly valuations; weigh the risks of payouts on temporary appreciations and ensure strong protections are in place.
  4. Waterfall Structures: Prefer European-style whole-fund assessments over American deal-by-deal models for better safeguards; clarify how profitability is measured in perpetual funds without a fixed end, and evaluate dynamic accounting methods.
  5. Make-Whole Provisions: Ensure provisions guarantee full capital recovery plus hurdle rates before manager payouts, with adjustments for redemptions; avoid weak versions that only cover principal and check for equitable treatment across investors.
  6. Hurdle Rates: Aim for 6-8% thresholds, ideally floating (e.g., tied to SOFR); scrutinize if lower rates allow easy fee triggers on modest gains, and confirm fair catch-up mechanisms for managers.
  7. High Watermark Provisions: Require perpetual, non-resetting watermarks to prevent fees on loss recoveries; verify that NAV must exceed prior peaks before charges apply, protecting against cyclical market rebounds.
  8. Clawback Mechanisms: Mandate enforceable clawbacks via escrows or guarantees for repaying excess fees on reversed gains; assess implementation in open-ended structures, such as annual reviews, to ensure long-term accountability.
  9. Administrative and Operational Expenses: Check the breakdown in the TER for costs like accounting, legal, custody, and audits (0.1-0.5%); look for expense caps and reimbursements to avoid uncapped surprises in regulatory-heavy funds.
  10. Leverage-Related Expenses: Evaluate interest on borrowings (1-3%+ drag); review leverage ratios and debt terms, ensuring potential return enhancement justifies costs, especially in rising rate environments.
  11. Acquired Fund Fees and Expenses (AFFE): In multi-manager setups, assess layered fees from underlying funds (0.5-2%); compare to single-manager options and confirm if co-investments reduce this through no-fee access.
  12. Organizational and Offering Expenses: Confirm amortization over 3-5 years and any caps on setup costs; ensure they're not excessively passed through, diluting early returns in new funds.
  13. Subscription and Redemption Fees: Scrutinize one-time charges (1-2% for subscriptions, 0.5-2% for redemptions); evaluate against liquidity provisions and check for waivers or declining scales to minimize penalties for access.
  14. Overall Fee Impact: Simulate scenarios with market volatility to model total fee drag on net returns; benchmark the full TER against peers and consult the prospectus for transparency on all charges.

Navigating the fee landscape in Evergreen funds demands vigilance, as these perpetual structures blend the accessibility of open-end vehicles with the complexities of private markets, often resulting in layered costs that can subtly diminish long-term returns. By dissecting management fees for their basis and scalability, performance fees for their safeguards like high watermarks and clawbacks, and other expenses—from administrative burdens to leverage interest—for their transparency and caps, investors can better align with funds that prioritize true value creation over cost extraction. Ultimately, the key lies in holistic due diligence: benchmark against peers, simulate fee drag in volatile markets, and consult advisors to ensure the fund's economics support your investment horizon. In an era of democratized alternatives, understanding these nuances empowers investors to capture the benefits of Evergreen strategies while minimizing the price of perpetuity.

As you work through each item of the checklist, remember that in perpetual structures, seemingly minor differences compound significantly over multi-year holding periods. Benchmark against peers, simulate fee drag in various market scenarios, and don't hesitate to engage fund managers directly on ambiguous terms or missing safeguards. When in doubt, consult advisors who specialize in alternatives to pressure-test your findings.

The goal isn't simply finding the cheapest option. It's identifying funds where the economics reflect genuine alignment of interests, robust investor protections like high watermarks and clawbacks, and transparent cost structures that support long-term net returns. In an era where alternative investments are increasingly accessible, understanding these nuances empowers you to capture the benefits of Evergreen strategies while minimizing the hidden price of perpetuity.

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