Management Fees, Carried Interest and Hurdle Rates

A private equity or venture fund's economics rest on two separate fees that get paid on completely different terms. The management fee is a steady, predictable charge — typically 2% a year — that covers the manager's salaries, office and deal-sourcing costs, and gets paid whether the fund's investments are doing well or badly. Carried interest is the manager's real upside: typically 20% of the fund's profits, but paid only after investors clear a hurdle rate, a minimum return the fund must earn before the manager shares in any gains at all.

What the management fee is charged on

The 2% fee usually isn't 2% of the fund's current value — it's charged on committed capital (the total amount investors pledged) during the fund's investment period, then often steps down to 2% of invested capital (money actually deployed into deals, net of what's been sold) once that period ends. This distinction matters: a fund still charging 2% of the full original commitment years after most of that capital has already been returned to investors is charging fees on money it's no longer managing, which is exactly the kind of term LPs (limited partners, the investors) negotiate down in fund agreements.

The hurdle rate

The hurdle rate — commonly 8% a year, compounded — is the minimum return LPs must receive before the manager earns any carried interest. If a fund returns 6% a year, the manager typically earns zero carry regardless of how much absolute profit was generated, because the return never cleared the hurdle. This is deliberately designed to align the manager's biggest payday with genuinely strong performance, not just any profit.

Fee	Rate	Paid on	Timing
Management fee	~2%/year	Committed, then invested capital	Every year, regardless of performance
Carried interest	~20% of profits	Profits above the hurdle	Only on exit, only if hurdle is cleared

What this means in practice

For an investor comparing two funds with identical "2 and 20" headline terms, the fine print on fee basis (committed vs. invested capital), fee step-downs, and how the hurdle is calculated (whole-fund vs. deal-by-deal, covered in Carried Interest and Distribution Waterfalls) can change actual net returns by several percentage points a year — headline fee terms alone tell you very little about what an investor actually keeps.