Fee Offset Mechanism

A Fee Offset Mechanism is an LPA provision that requires management fees to be reduced by some or all of the ancillary income the GP receives from portfolio companies. Common offset items include board seat compensation, monitoring or consulting fees, transaction fees charged in connection with investments, and director fees. The offset percentage varies—a 100% offset means every dollar of portfolio company fees reduces management fees by a dollar, while an 80% offset reduces fees by 80 cents on the dollar. This mechanism prevents the GP from double-dipping by collecting management fees from LPs and additional fees from portfolio companies simultaneously. The offset is typically calculated annually and applied against the following year's management fees. Some LPAs provide for a 100% offset but allow the GP to retain a small portion (often the first $50,000-$100,000) for board service.