It’s a classic scene from Goodfellas. Henry Hill explains how the mob squeezes every penny from a business until it collapses. “They buy your truck, but somehow you’re still paying for the gas.”
Well, welcome to the world of evergreen fund fees. One of the most overlooked costs in alternative investing is fees on leverage in evergreen funds—a structural issue that directly affects investor returns.
We’ve been digging through prospectuses lately (yes, we lead thrilling lives), and wanted to take a second to point out something that should make any sophisticated investor pause. They’re marketed as investor-friendly, but hear us out, then decide for yourself.
The Shell Game: Gross vs. Net Asset Fee Calculations
Look, the concept here isn’t rocket science, but the implications are important for investors to understand. When funds use leverage—borrowing money to amplify their investment capacity or manage liquidity—they have two choices for calculating management fees:
Option A: Charge fees only on net assets (the money you actually invested)
Option B: Charge fees on gross assets or “Managed Assets” (your money plus any borrowed cash)
Guess which option some of the biggest evergreen fund managers prefer? Spoiler alert: it’s not the one that saves you money.
Here’s why this matters more than your typical fee discussion.
- Suppose you invest $100,000 in a fund that borrows another $100,000 (2x leverage).
- If the fund charges a 1.5% fee on gross assets, your fee is calculated on $200,000 = $3,000/year.
- If the fee were based only on your $100,000 investment, the fee would be $1,500/year.
The Scorecard: What We Found in the Wild
We are building out a spreadsheet to track the various fees these funds charge. Here’s what we found after going through the first four prospectuses from some of the biggest names in alternatives…
The Fee on Leverage Club:
- Ares Diversified Credit Fund
- Hamilton Lane Private Assets Fund
The Net Assets Club:
- Carlyle AlpInvest Private Markets Fund
- Apollo S3 Private Markets Fund
2 out of four. So far, it’s essentially a coin toss whether or not a manager will charge management fees on leverage. Honestly, we were a little surprised—we assumed it’d be all of them.
Our point is. This is important to understand and to check before making an investment. We suppose it’s fine if you are aware of it and decide to invest anyway.
They all tell you to invest like institutional investors. Well, Institutional investors typically negotiate fees. Think you’ll have any luck with that?
Why This Isn’t Just About Fees
We joke around a lot, but this stuff has real consequences. It’s a classic problem. The manager gets paid more for borrowing. Call us old-fashioned, but fee structures should align interests, not create the potential for moral hazard.
And I remind you, these are name-brand firms with billions of dollars under management. They shouldn’t need to squeeze extra basis points out of your clients—but they do it anyway because, well, nobody’s stopping them, and people keep piling into their funds.
The Real Cost of Fees
Let’s do some back-of-the-napkin math. On a $1 billion private equity evergreen fund using 25% leverage and charging a 1.5% management fee on gross assets, the difference between calculating fees on gross versus net assets would be about $3.75 million annually. That may seem small in percentage terms, but over time, it adds up—and it comes directly out of investor returns.
In a fund structure where leverage is used primarily for liquidity management, not to drive returns, that fee differential deserves closer scrutiny.
And btw, this is before we even talk about performance fees. The compounding effect on your actual returns can be brutal over a 10+ year hold period. We did the math in a previous article here: Asset Allocation 201: Fees—The Silent Performance Killer
What This Means for Due Diligence
Manager selection is critical—period. But it’s not just about track records and team experience. You need to dive into the fee mechanics with the same rigor you apply to everything else.
When you’re reviewing evergreen fund terms, ask these questions explicitly:
1. Are management fees calculated on gross or net assets?
- Why it matters:
- If fees are based on gross assets, the adviser earns fees on borrowed capital as well as investor capital.
- If based on net assets, fees align more closely with the capital actually contributed by investors.
- Implication: Fees on gross assets can incentivize excess leverage, potentially misaligning manager and investor interests.
2. How does the fee structure change as leverage increases?
- Why it matters:
- Leverage can magnify returns and risks.
- A fund that charges fees on gross assets may increase its fee revenue simply by borrowing more, regardless of performance.
- Implication: This creates an incentive to take on leverage even when it’s not in investors’ best interest.
3. What happens to fee calculations during market stress when leverage ratios spike?
- Why it matters:
- In a downturn, asset values may fall faster than liabilities can be reduced, increasing leverage ratios.
- If fees are based on gross assets, managers might continue collecting high fees even as investor capital erodes.
- Implication: Investors could be paying more relative to the value of their investment, worsening outcomes during market stress.
Most marketing materials don’t volunteer this information. You’ll need to dig into the actual prospectus and—better yet—also ask directly during management presentations.
The Bottom Line
Yes, alternatives come with complexity—but not all complexity is created equal. The use of borrowed capital to inflate fee bases isn’t a necessary byproduct of sophisticated investing; it’s a deliberate design choice that shifts economic value from clients to managers.
For years, the industry has been pushing the “democratization” of private markets as a way to broaden access and improve investor outcomes. But when evergreen fund structures quietly layer fees on leverage, that narrative falls flat. Access without alignment is a hollow promise.
If private markets are truly to serve individual investors, transparency and structural fairness must come first. Until that happens, investors—and their advisors—should treat fee-on-leverage structures as a red flag, not a footnote.
Disclaimer:
This article is for informational and educational purposes only and should not be construed as providing tax or legal advice. It does not take into account the specific investment objectives, financial situation, or particular needs of any reader. Readers should consult with their own tax, legal, and financial advisors to determine the appropriateness of any investment strategy or approach mentioned herein.
