As of today I've raised $250K for my Rolling Fund. As the capital commitment increases, my quality of thinking is increasing. The questions I'm asking myself are getting better, the questions investors are asking are getting more refined too.
Yesterday an LP asked me about my fund's fee structure. This can be confusing.
The Rolling Fund wording and language can be "fancy" and while I understand it in my mind (I've been looking this product since October 2020), I took some time to break it down.
The assumptions of the fund:
- Management Fee: 2%
- AngelList Administrative Fee: 0.15% (annually, minimum $20K/quarter)
- Recycling Management Fee: Yes
It is easy to get stuck on the $20K/quarter and think, "This is pretty steep." My LP did the same.
Here's a screenshot of the the model of my fund for the first year. In the screenshot below you will see that path to a $2.5 m per quarter fund starts at $250K. While the initial group of LPs are retail investors, the fund will also bring on institutional investors over the coming quarters.
Let's break this down:
How does the management fee work?
In this structure, the management fee is 2% on a 10-year fund life. To clarify, each quarter is its own fund and has a life of 10 years. The management fee for the fund (in said quarter) is withheld during that quarter. This isn't a one-time 2% fee, it's a 2% fee per year for 10 years.
For Q1 we have $250K of contributed capital. The 2% management fee gives us a fee of $5K. Over 10 years this is $50K. This will be withheld within the quarter.
How does the admin fee work?
Given I have early access to Rolling Fund the minimum quarterly admin fee of $20K is waived for the first two quarters. In the model I have, that minimum will be paid out in Q3. (Note: Without the minimum, the Q3 admin fee would have been $15K, so an additional $5K.)
What's the effective management fee?
This matters. While the number are a bit all over the place, a traditional fund has a fee load of ~15%. If I didn't recycle my management fee, my effective management fee would be 21.5%. By recycling the fee the effective management fee is 15.4%. Given the stage of company and the access I have I feel comfortable with this range. That being said I'm looking to create LP-GP alignment so I will be recycling this fee.
What is the benefit of recycling the fee?
The management fee cuts into the dollars available for investment. That's not good. Recycling the fee has the opposite effect, increasing the investable pool of capital while offsetting a proportion of the management fee. This is good.
Since the beginning I've been clear on my objective with this fund: achieve a 3X net multiple to you the LP. By recycling I only need to generate a 3.65x gross multiple vs. a 4.10x gross multiple.
At the end of the day most GPs focus on gross numbers. The only number that is going to matter to you is the net multiple.
Understanding these principles and pillars is important for me and it's important that my LPs have clarity.
Vikrant Duggal Newsletter
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