Key Highlights
- Private market investments often involve multiple layers of fees that may not be apparent from a fund's stated management fee.
- Incentive fee structures can influence manager behavior, making it important to understand hurdle rates, catch-up provisions, and high-water marks.
- Strong fee literacy can help advisors compare opportunities more effectively and support more informed client conversations.
Private markets are moving further into the mainstream of wealth management. As more companies remain private longer and access credit through non-bank lenders, sizable portions of value creation move away from public markets. Advisors are increasingly evaluating semiliquid investment structures to access this value creation as potential portfolio solutions for clients.
In an online survey of 600 U.S.-based private investors with at least $500,000 in investable assets, 77% said they invest in private markets through a financial advisor. Another 89% said they would allocate to private markets if their advisor strongly recommended it.1
Despite this demand, advisor-client conversations around private market investments remain limited. Only 26% of investors reported having in-depth discussions while 30% have had none.2
One barrier to these conversations may be the complexity of the private market fund structures that shape outcomes. Among the most important, and most frequently underestimated, are fees.
Private market investing requires a different due diligence lens
Private market adoption may be accelerating faster than advisors’ familiarity with the mechanics that underpin these investments. Traditional due diligence frameworks built around liquid public securities do not always translate cleanly to private markets.
Private market fees are the costs investors pay to access, manage, and administer investments in private assets - such as private equity, private credit, real estate, or infrastructure. They include management fees, performance-based incentives, and other fund expenses.
Private market investments often introduce additional layers of complexity, including:
- Fee structures
- Liquidity considerations
- Valuation methodologies
- Leverage
- Manager incentives
These factors are not just structural differences. They can materially shape investor outcomes and the range of possible risks. The core challenge is not simply accessing private markets. It is understanding what drives results once capital is deployed.
Why fee structures deserve attention
Private market fee structures often differ significantly from those associated with traditional investment products invested in public securities. Depending on the strategy, manager, and vehicle, investors may encounter a combination of fees that can include:
- Management fees: A fixed annual percentage (typically 1% to 2%) paid to the fund manager to cover day-to-day operational costs.
- Incentive or performance fees: A profit-sharing cut (usually 15% to 20% of gains) paid to the manager only after the fund surpasses a pre-agreed minimum return target.
- Interest expense associated with leverage: The passed-through borrowing cost incurred when a fund utilizes debt or bank lines of credit to amplify its investment size.
- Acquired Fund Fees and Expenses (AFFE): The layered, underlying costs that occur when a fund invests in other funds, creating a "fees within fees" structure.
- Administrative and operational expenses: The routine passed-through costs required to maintain the fund, including legal, audit, tax, and compliance services.
For advisors, fee analysis is not just about evaluating cost. It is about understanding incentives, alignment, and how decisions may be influenced over time. Private market fee structures can influence manager decision making, portfolio construction, risk management, and the timing of realized gains.
Understanding incentives behind the fees
Incentive or performance fees are among the most distinctive aspects of private market investing. They are designed to align managers with investors by rewarding strong performance, but the structure of that incentive matters.
Some structures may encourage additional risk-taking because they participate in gains without fully sharing in losses. This makes it important for advisors to understand not only the existence of incentive fees, but also how they are earned.
Common incentive fee mechanics include:
Hurdle rates:
A hurdle rate establishes the minimum return a fund must achieve before incentive compensation becomes available to the manager. The hurdle is intended to ensure investors receive a baseline level of return before performance-based fees are assessed.
Catch-up provisions:
Once a hurdle rate is met, catch-up provisions can shift a larger share of subsequent returns to the manager until a predetermined allocation is reached. Although these structures can appear complex, understanding how catch-up provisions operate can help advisors better evaluate the economics of a fund.
High-water marks:
High-water marks help prevent managers from earning performance fees on gains that merely recover prior losses. Under these arrangements, managers generally must exceed a previous performance peak before becoming eligible to earn additional incentive compensation. High-water marks are commonly viewed as an important investor protection mechanism because they help align fee payments with genuine value creation.
What advisors should look for in fee structures
Strong fee literacy translates into better questions and more effective due diligence. When evaluating private market investments, advisors should consider:
- Transparency: Are all layers of fees clearly disclosed, including underlying fund expenses and performance compensation?
- Alignment: Do incentive structures reward long-term value creation, or shorter-term gains?
- Consistency: How do fee terms compare across similar managers or strategies?
- Leverage impact: How do borrowing costs affect net returns in different rate environments?
- Fee timing: When are fees charged and realized relative to investor liquidity?
Identifying these factors can help surface hidden costs and potential misalignment before capital is committed.
Looking beyond the headline fee
Effective fee analysis requires looking beyond a single number. Acquired fund fees may not fully capture all underlying performance-based compensation. Likewise, leverage-related costs may fluctuate over time depending on borrowing levels and prevailing interest rates.
Advisors should aim to understand:
- What fees are being charged
- How those fees are calculated
- When those fees become applicable
- Whether incentives appear aligned with investor outcomes
This perspective helps advisors move from surface-level comparisons to deeper evaluation of economics and alignment.
While fee literacy alone is not sufficient to evaluate a private market investment, it can help advisors ask more informed questions, assess manager alignment more effectively, and set clearer expectations with clients.
Download our Private Market Fees whitepaper to dive deeper into private market fee mechanics.
