As more companies remain private longer, clients’ interest in private markets continues to grow. Expanded access through semiliquid and retail-oriented structures has created new opportunities, but it has also increased the complexity of due diligence.
Many traditional frameworks were built around public markets, where pricing and costs are more transparent. Private market investments introduce additional fee layers, including performance-based compensation, leverage, liquidity constraints, and operational expenses.
Understanding how fees are structured helps advisors assess how a fund operates, how a manager is incentivized, and whether the investment aligns with a client’s goals and risk tolerance.
Why fee analysis matters beyond cost
Private market fees affect more than investor returns. They can shape manager behavior, influence portfolio construction, and create different risk incentives. While performance-based fees are intended to align managers with investors, some arrangements may encourage additional risk-taking.
In private markets, fees are often intertwined with fund structure, valuation methodologies, liquidity provisions, and the manager's investment approach.
Industry observers have highlighted concerns about valuation uncertainty, limited transparency, illiquidity, and layered fee structures, which can make it difficult to fully assess the investor experience.
Advisors should evaluate not only how much a fund charges, but also:
- When fees are charged
- How performance is measured
- Whether fees are based on realized or unrealized gains
- Whether leverage affects fee calculations
Before recommending a private market fund, advisors should be able to confidently answer the following five questions to clients about the fee structure:
1. What am I paying for?
Private market fee structures often include multiple layers of costs that extend beyond a stated management fee. Depending on the strategy and vehicle, investors may pay:
- Management fees
- Incentive or performance fees
- Interest expense
- Acquired Fund Fees and Expenses (AFFE)
- Administrative and operational expenses
Fee structures can vary significantly by manager, strategy, and fund vehicle. As a result, a management fee alone rarely tells the full story. Understanding all sources of cost helps advisors assess the true economics of an investment and compare opportunities more effectively.
2. How are management fees calculated?
Not all management fees are calculated the same way. In some private market funds, the fee is based on the fund's net assets—the value of the assets after deducting debt. In others, the fee is based on gross assets, which includes money the fund has borrowed through leverage.
This distinction matters because leverage can make a fund appear larger from an assets under management perspective. As a result, two funds with the same stated management fee may generate different costs for investors if one calculates fees on gross assets and the other uses net assets.
When evaluating a private market fund, advisors should understand exactly which asset base is used to calculate management fees and how leverage may affect the total cost of ownership.
3. How and when does the manager earn incentive compensation?
Many private market funds compensate managers through performance-based incentive fees.
These fees are intended to align manager and investor interests, but structures can vary considerably across funds.
Key considerations include:
- What performance must be achieved
- Whether incentives apply to gains that are realized or unrealized
- How frequently performance is measured
- When incentive fees are earned and paid
Performance fee structures directly affect how investment gains are shared between investors and managers.
4. What protections are in place before the manager earns incentive compensation?
Not all performance fee structures operate the same way. Many private market funds include provisions that determine when managers can begin earning incentive compensation and how much they can receive. Understanding these mechanics can help advisors evaluate whether a manager's interests are aligned with those of investors.
These provisions may include:
- Hurdle rates – A minimum return that must be achieved before the manager can earn incentive compensation.
- Catch-up provisions – A mechanism that allows the manager to receive a larger share of profits after the hurdle rate has been met, until the agreed-upon profit split is reached.
- High-water marks – A requirement that the fund recover prior losses before additional incentive fees can be charged.
- Loss recovery mechanisms – Provisions designed to ensure that periods of underperformance are addressed before managers participate in future gains.
These features can have a meaningful impact on investor outcomes. Two funds with similar performance fee percentages may produce very different results depending on the protections built into the fee structure.
5. Are there additional costs from underlying investments?
For advisors conducting due diligence on private market products, the question "What does this fund charge?" should be reframed as "What are the total costs an investor may bear throughout the entire investment structure?" A fund's stated management and incentive fees may not reflect the full cost of investing. In some private market structures, investors can also be exposed to expenses incurred by the underlying investments or funds held within the portfolio.
For example, a fund-of-funds may invest in multiple private market funds, each with its own management fees, performance fees, and operating expenses. Similarly, some private market strategies use financing or leverage, which can introduce borrowing costs that ultimately affect investor returns. These expenses may not always be obvious when reviewing a fund's headline fee schedule.
Additional costs may include:
- Acquired Fund Fees and Expenses (AFFE) – Expenses associated with underlying funds in which the primary fund invests.
- Underlying fund expenses – Management, performance, and operating costs charged by portfolio funds or investment vehicles.
- Financing and leverage-related costs – Interest expenses and other costs associated with borrowed capital used to enhance purchasing power.
While these costs may be disclosed in fund documents, they are easily overlooked. Looking beyond a fund's stated management and incentive fees can provide a more complete picture of total investor costs and help advisors make more informed comparisons across investment opportunities.
Better fee literacy supports stronger due diligence
Private markets are likely to remain an important growth area within wealth management. As adoption expands, advisors may need to deepen their understanding of fee structures, incentive mechanisms, and cost drivers. Advisors who understand how fees are structured and applied may be better positioned to evaluate manager alignment, compare investment opportunities, set realistic expectations around performance and expenses, and conduct more thorough due diligence. This knowledge can also help support more informed client conversations about the role private market investments may play within a broader portfolio strategy.
To learn more about incentive fees, hurdle rates, high-water marks, and other key fee mechanics, download our Primer on Private Market Fees.
