Fund Economics Simulator

The '2 and 20' fee structure means the GP (fund manager) charges a 2% annual management fee on committed capital plus 20% carried interest on profits above a hurdle rate (usually 8%). The management fee covers operating costs like salaries, rent, and travel. The carry is the GP's share of investment profits and is the primary way fund managers build wealth. Some emerging managers charge 2.5% fees on smaller funds to cover overhead.

During the investment period (typically years 1-5), management fees are charged on total committed capital — so a $100M fund charges $2M/year regardless of how much has been deployed. After the investment period, most funds step down to charging fees on invested (not committed) capital, which reduces the fee as companies exit and capital is returned. Over a 10-year fund life, total fees typically consume 15-20% of committed capital.

A hurdle rate (preferred return) is the minimum annual return LPs must receive before the GP earns any carried interest. The industry standard is 8% per year, compounded. This means on a $50M fund, LPs must receive approximately $108M back before the GP earns carry. The hurdle protects LPs from paying performance fees on mediocre returns and aligns GP incentives with generating returns that meaningfully outperform public markets.

Gross returns measure portfolio performance before fees and carry are deducted — this reflects the GP's investment skill. Net returns are what LPs actually receive after management fees and carried interest are subtracted. A fund with 3x gross returns might deliver only 2.3-2.5x net to LPs after fees and carry. LPs evaluate funds on net returns because that's their actual economic outcome, while GPs often market gross figures because they look better.