Fees and Carry

“Fees and carry” is the fund-economics layer — management fees plus carried interest — that Kyle treats as a structural lever shaping how capital flows between limited partners and the managers who deploy their money. In his LP note it sits alongside Direct Investments as one of the levers an LP pulls when the standard fund relationship disappoints; the saved article on CalPERS pulling almost $14B from its equity managers is the concrete trigger Kyle filed under this topic.

The sharpest articulation in the corpus comes from Charlie Munger: Philanthropy Roundtable. There Charlie Munger makes the “febezzlement” argument: if a foundation “wastes three percent of assets per year in unnecessary, nonproductive investment costs in managing a strongly rising stock portfolio, it still feels richer, despite the waste,” while the people collecting that wasted three percent feel they are virtuously earning income — a process “functioning like undisclosed embezzlement without being self-limited.” Kyle’s own annotation reads: “We don’t see aggregate trading costs, so we day trade, only paying attention to the big number; ending balance.” The point is that fee drag is invisible to the people paying it, which is precisely why it compounds against LPs and endowments.

Context: In venture and private-equity funds, “fees and carry” (the “2 and 20” model) refers to the annual management fee — typically ~2% of committed capital — that funds a GP’s operations, plus carried interest — typically ~20% of investment profits above a hurdle — that is the GP’s primary upside. The mix and level of fees versus carry is a recurring point of negotiation and friction between LPs and GPs.

Where this appears

• Charlie Munger: Philanthropy Roundtable — Munger’s “febezzlement” argument that wasted investment fees feel like virtuously earned income.
• LP — fees and carry as the economics LPs scrutinize before pulling capital or going direct.
• Direct Investments — the companion lever; LPs bypassing the fund (and its fee load) by investing directly.

From Roam

• https://www.privateequityinternational.com/endowments-foundations-grow-concerned-fees/
  • • Survey says: 40% of endowment and foundation managers say that private equity fund fees are a greater concern than ever before, due to muted return expectations, per a recent NEPC survey.
    • That said, 51% of respondents also expect PE to outperform other asset classes over the next 12-24 months, with 45% neutral and just 4% bearish.
    • 58% of respondents predict public equities will be flat or down in 2019, with rising interest rates and geopolitical tensions as the top risk factors.