You review your quarterly fund report.
Management fees look standard. Carry matches the LPA. Nothing stands out.
Years later, you compare results with peers who invested in the same fund. Same vintage. Same GP. Same strategy. Yet their net returns are consistently higher.
This gap isn’t luck. It isn’t timing. And it usually isn’t misconduct. It’s fee drag driven by opacity.
In private markets, small differences compound quietly.
A few basis points sustained over a ten-year fund life can materially affect:
When you don’t know your true all-in cost basis across funds, you can’t accurately compare managers. When you can’t distinguish recurring expenses from one-time charges, you can’t forecast cash flow with confidence. And when you discover years later that you’ve been paying more than peers, you can’t renegotiate terms. You can only commit elsewhere next time.
Most critically, LPs in the same fund can experience meaningfully different economics without realizing it.
One of the least intuitive realities in private equity is that investors in the same fund do not always pay the same effective fees.
Academic evidence confirms this. Begenau and Siriwardane (2024) show that many private equity funds effectively operate with multiple fee tiers, inferred from persistent dispersion in net-of-fee returns across LPs within the same vehicle. These differences arise even though investors hold identical underlying assets.
The source of this dispersion is contractual, not performance-based. Side letters override LPAs. Fee discounts, expense reallocations, carry terms, and offset mechanics are negotiated bilaterally. Most Favoured Nation (MFN) provisions exist, but they are often tiered by commitment size, limited in scope, or exclude economic concessions altogether.
The result is simple: one LP may pay meaningfully more than another without ever knowing a different deal exists.
Headline fees capture only part of the economic picture. Beneath them sits a layered structure of charges that materially affect net returns.
GPs often charge transaction, monitoring, exit, and director fees directly to portfolio companies. Research by Phalippou estimates that these fees amount to roughly 6% of equity invested across a broad sample of buyout transactions.
These charges reduce enterprise value available to LPs regardless of whether they are later offset against management fees. Whether offsets apply, at what rate, and to which investors depends entirely on negotiated fund terms and side letters.
On top of portfolio-company charges, funds incur a wide range of operating and transaction costs. Legal, administration, valuation, and broken-deal expenses are common, but how they are allocated between the fund and the GP is not standardized. The boundary between “management fee” and “fund expense” is negotiated.
Callan’s 2024 Private Equity Fees and Terms Study highlights substantial dispersion in fee structures across strategies, fund sizes, and managers. Even where offset provisions exist, the diversity of terms makes true all-in comparisons across funds impossible without normalization.
When these layers are combined, the gross-to-net gap is large and persistent.
StepStone’s analysis of nearly 200 funds estimates that management fees alone account for roughly 180 basis points of annual gross-to-net return drag. Once other fees and expenses are included, the total impact approaches 200 basis points all-in.
Separately, Begenau and Siriwardane estimate that within the same fund, the average difference in fixed fees between investor tiers is roughly 90 basis points. These differences are not cosmetic. Over a typical fund life, they materially change outcomes.
If fee opacity is so well understood, why does it persist?
First, negotiated inequality is efficient for GPs. Uniform pricing would either compress economics or constrain fundraising. Side letters allow price differentiation without reopening core terms.
Second, information asymmetry is durable. Side letters are private contracts. MFNs rarely require disclosure of who received which concessions. Administrators execute instructions, not comparisons.
Third, LPs face a collective-action problem. Everyone benefits from transparency, but no single investor wants to risk access by pushing too hard.
Finally, the regulation stalled. In 2023, the SEC adopted rules mandating standardized quarterly fee disclosure for private fund advisers. In June 2024, those rules were vacated in full before taking effect.
ILPA’s updated Reporting Template is a meaningful step forward, but it remains voluntary. It applies only to funds still in their investment period and only if GPs choose to adopt it. Legacy funds can continue using older templates indefinitely. Without regulatory teeth, adoption depends on LP pressure and whether transparency is viewed as an advantage or a risk.
This problem doesn’t require eliminating negotiation. It requires eliminating blind spots.
At Tetrix, we’ve seen investors uncover systematic mispricing of management fees relative to other LPs in the same funds. Not as isolated cases, but as patterns repeated across dozens of commitments. These weren’t headline discrepancies. They were small, persistent differences that only became visible once fees were normalized across the entire portfolio.
If you’re managing capital across 10, 50, or 600 funds, the question isn’t whether hidden fees exist. It’s whether you have the visibility to know where they’re hiding.