1) What are soft-dollar arrangements, and how do they work?
In soft-dollar arrangements, a manager routes trades through a broker at higher commissions in exchange for research or brokerage services that support investment decisions (subject to regulatory standards and disclosures). Consider:
- What qualifies as research/brokerage vs. what must be paid in hard dollars.
- Disclosures & policies: Is there a clear best-execution process and a periodic review?
- Conflicts & oversight: How does the manager ensure client benefit and avoid excessive commissions?
2) How do placement fees or clawbacks impact returns?
- Placement/marketing fees: Paid to placement agents; may be charged to the fund or manager. If fund-borne, they reduce LP net returns; look for offsets/caps and whether they’re included in the expense cap.
- Clawbacks (carry give-back): If a GP receives carried interest early but later performance falls short, a clawback requires the GP to return excess carry so LPs receive the full preferred return.
- Why it matters: Placement fees raise the J-curve and lower MOIC/IRR if not offset; clawbacks protect LP economics but introduce timing risk (will the GP be able to pay?). Prefer escrows or guarantees.
3) What questions should I ask about the fee waterfall?
- Hurdle & carry: What is the preferred return, carry %, and GP catch-up structure?
- Fee base: Are management fees charged on committed capital, invested capital, or NAV—and how do they step down post-investment period?
- Offsets: Do transaction/monitoring/origination fees offset management fees (100% vs. 50%)?
- Expenses & caps: Which organizational/fund expenses are LP-borne, and are there caps?
- Recycling: Can the GP reinvest realizations (recycling) and under what limits?
- Leverage & sub lines: How are subscription lines used and disclosed (impact on gross-to-net and reported IRR)?
- Clawback mechanics: Net of taxes? Escrow %? Timing and security of any GP give-back.
- Side letters/MFN: Do some LPs have better economics, and do you have MFN rights?