boltKey takeaways
- The management company is the operating business of a fund manager: it employs the team, acts as investment adviser and receives management fees.
- It is kept separate from the GP entity so that fee income, carried interest and liabilities stay distinct.
- Management fees should cover the firm's operating budget; carry is upside, not payroll.
- Expense allocation between the management company and the funds is a recurring regulatory focus and must follow the LPA exactly.
- Depending on assets under management and strategy, the management company registers as an investment adviser or files as an exempt reporting adviser.
A management company is the operating entity of a private fund manager. It employs the investment and operations team, signs the leases and vendor contracts, acts as the investment adviser to each fund, and is paid the management fees that the funds owe under their governing documents. If the general partner is the entity that controls each fund, the management company is the business that does the work.
Most firms run one management company across many funds and many GP entities. Getting its structure, budgeting and regulatory status right is part of building a durable firm, not just launching a fund.
How the management company fits the structure#
| Entity | Typical form | Main income | Main role |
|---|---|---|---|
| Management company | LLC (sometimes an LP) | Management fees, and sometimes other fees offset against them | Investment adviser; employer; operating business |
| General partner | LLC, usually one per fund | Carried interest and return on GP commitment | Controls the fund partnership |
| Fund | Limited partnership | Investment returns | Holds the portfolio |
The fund signs an investment management agreement (or the LPA appoints the manager directly), delegating day-to-day investment advice and administration to the management company. The management company is typically owned by the firm's founders or partners, and its ownership can differ from carry allocations in the GP entities. That separation lets a firm reward people differently for running the business and for fund performance.
Keeping the entities apart also helps contain liability and keeps tax treatment cleaner: management fees are ordinary income to the management company, while carried interest flows through the GP and may qualify for capital gain treatment subject to the holding period rules. See fund structures for the broader picture.
What the management company does#
- Investment advisory: sourcing, diligence, investment recommendations, portfolio monitoring and exits.
- Employment: salaries, benefits, bonuses and hiring for the whole firm.
- Firm operations: office, technology, insurance, vendors and travel.
- Fund operations oversight: supervising administrators, auditors, tax preparers and counsel for each fund.
- Compliance: running the firm's compliance programme, filings and policies.
- Investor relations and fundraising: marketing current and future funds.
Revenue: management fees#
The management company's core revenue is the management fee. The fee is set in each fund's LPA, commonly as a percentage of committed capital during the investment period and then of invested capital or net invested capital afterward. It is usually paid quarterly or semi-annually in advance, funded by capital calls on LPs.
Other income can include transaction, monitoring or director fees received from portfolio companies. Many LPAs require that all or part of those fees offset the management fee, so the firm should track them carefully and apply the offset precisely.
Worked example: budgeting from fee income#
Assume a manager runs two funds:
| Fund | Fee base | Fee rate | Annual fee |
|---|---|---|---|
| Fund I (post investment period) | $120M net invested capital | 1.5% | $1.8M |
| Fund II (investment period) | $300M commitments | 2.0% | $6.0M |
| Total fee revenue | $7.8M |
If the firm's budget is $6.9M (people, rent, technology, travel, compliance, insurance), the management company runs a $0.9M margin. Now assume Fund II's investment period ends and its base steps down to $220M of net invested capital at 1.5%: its fee falls to $3.3M. Unless Fund III has closed, total fee revenue drops to around $5.1M, below the current budget. Fee step-downs are predictable, so plan headcount and fundraising timing around them rather than assuming fees will grow.
A common principle is that management fees should cover the cost of running the firm, while carried interest rewards performance. Firms that rely on carry to fund operations take on liquidity risk, because carry is uncertain and arrives late.
Expense allocation: management company versus fund#
The most persistent operational and regulatory issue for management companies is deciding which costs belong to the firm and which can be charged to the funds. The LPA governs, but some general patterns:
| Typically management company | Typically fund (if LPA permits) |
|---|---|
| Salaries and benefits | Fund legal, audit and tax preparation |
| Office rent and general overhead | Fund administration |
| Firm-level technology | Deal-related legal and diligence |
| Fundraising for future funds | Broken-deal expenses |
| Compliance programme costs (often) | Fund-level insurance (as allowed) |
Grey areas include compliance and regulatory costs, technology that serves both the firm and the funds, in-house staff who perform services that could be outsourced, and travel that mixes deal work with fundraising. The SEC has brought numerous enforcement actions over the years involving misallocated fees and expenses. The 2023 Private Fund Adviser Rules, which would have added specific restrictions on charging certain costs to funds, were vacated by the Fifth Circuit in June 2024, but advisers remain subject to the Advisers Act anti-fraud provisions and must follow their disclosures and governing documents.
Practical controls:
- Write an expense allocation policy that maps each common category to the LPA.
- Code every invoice to an entity at entry, with the policy reference.
- Allocate shared costs on a documented, consistent basis (for example, by commitments or invested capital).
- Review allocations at each period close, and keep support.
- Disclose any judgement areas clearly to LPs.
Regulatory status#
Because it advises the funds, the management company is the entity that registers as an investment adviser or relies on an exemption under the Investment Advisers Act of 1940:
- SEC-registered investment adviser. Generally required once regulatory assets under management reach $100M, unless an exemption applies. Registered advisers must adopt a compliance programme with a chief compliance officer and are subject to the custody, marketing and other rules. See registered investment adviser.
- Private fund adviser exemption. Advisers solely to private funds with less than $150M in regulatory assets under management in the United States can report as exempt reporting advisers.
- Venture capital fund adviser exemption. Advisers solely to venture capital funds, as defined by SEC rule, can also report as exempt reporting advisers regardless of size.
- State regulation. Smaller advisers may be subject to state registration or exemption rules.
Exempt reporting advisers still file portions of Form ADV and remain subject to anti-fraud rules and SEC examination. Registered advisers with at least $150M in private fund assets also file Form PF. Confirm your firm's status and filing obligations with regulatory counsel.
Accounting for the management company#
The management company keeps its own books, separate from the funds:
- Revenue: management fees accrued per the fund documents, net of offsets.
- Receivables and payables with funds: expenses paid on a fund's behalf and reimbursed, or fund payments of firm expenses that must be recharged. Reconcile these intercompany balances every period.
- Compensation: salaries, bonuses and benefits, often the largest cost line.
- Owners' equity: partner capital, distributions to owners and any working capital lines.
Fee revenue on the management company's books should agree exactly with fee expense on each fund's books. Mismatches usually point to offset, timing or step-down errors.
How Privatis helps#
Privatis calculates management fees from each fund's terms, including step-downs and offsets, and posts them to a double-entry ledger with period close so fund expense and management company revenue agree. A compliance filings calendar tracks Form ADV and other deadlines, DDQ responses can be kept current, and an audit trail records every change for exams and audits.