The Hidden Face of Funds: When Carry and Management Fee Structures Reveal GPs' True Nature
Last week, we explored the structure of investment funds. Today, let's dive into a much more revealing dimension: how the management of these structures unveils the true convictions of General Partners (GPs). Beyond marketing speeches and well-rehearsed pitches, two financial elements betray the deep philosophy of managers: carried interest and management fees.
1. Carry: When Profit Becomes an Impact Lever
Carried interest represents the share of profits generated by a fund that goes to GPs after reaching a certain performance threshold. Traditionally set at 20% of profits beyond the hurdle rate (generally an 8% IRR or a 2x DPI multiple), this financial instrument was designed to align the interests of Limited Partners (LPs) and managers. But beyond this primary function, carry management is now becoming a powerful philosophical marker.
The Traditional Mechanics of Carry: A Financial Incentive System
To better understand the scope of current innovations, let's recall the classic functioning of carried interest. In a traditional venture capital fund:
GPs typically invest 1-2% of the fund's total capital (commitment)
They receive 20% of profits generated beyond the hurdle rate
This system creates considerable leverage: a GP having invested €1M in a €100M fund can potentially receive €20M in carry if the fund doubles in value
This risk/reward asymmetry has been the cornerstone of the private equity industry for decades. It helps attract and retain the best talent by offering considerable upside.
Philanthropic Carry: When GPs Put Their Money Behind Their Convictions
An emerging trend reveals a new generation of funds where personal profit maximization is no longer the sole motivation. These innovative structures redefine the risk/reward equation by integrating a third element: societal impact.
Concrete examples:
🔗 Racine² Fund (Serena Capital): commits to donating a portion of carry to associations if the fund's impact objectives are not met, even if economic performance is satisfactory. This conditional mechanism acts as a societal insurance for the fund and further aligns interests.
🔗 Raise Sherpa: systematically allocates a fraction of its carried interest to organizations working for a more virtuous world. To date, this initiative has distributed several million euros to associations.
🔗 Future Positive Capital: has developed a model where part of the carry is reinvested in technology education projects in disadvantaged areas, creating a virtuous circle between financial and societal value creation.
This approach is particularly significant because it involves a conscious and deliberate patrimonial sacrifice – GPs voluntarily give up part of their potential compensation, sometimes considerable, for the common good.
Impact on Team Structure: A Natural Selection of Talent
A fascinating collateral effect of these alternative carry approaches is their impact on the composition of management teams. Funds adopting these practices naturally attract profiles that value impact beyond simple personal profit maximization.
We thus observe a form of "inverse Darwinian selection" where:
Profiles exclusively motivated by personal enrichment tend to avoid these structures
Talents more aligned with a holistic vision of performance (financial + impact) concentrate there
This dynamic progressively creates teams with coherent values, capable of carrying a long-term vision that goes beyond simple financial return objectives.
2. Management Fees: From Operational to Societal Commitment
If carry represents the variable and uncertain part of GP compensation, management fees constitute their fixed income. Traditionally intended to cover the operational costs of the fund (salaries, premises, due diligence, etc.), these fees are not primarily meant to enrich managers but to allow effective portfolio management.
Yet a remarkable evolution is also observed in this area.
Anatomy of Management Fees: A Structure Under Pressure
The classic structure of management fees (generally 2% of AUM during the investment period, then degressive) is subject to growing pressure:
Increased competition: the influx of capital into private equity has intensified competition between managers
LP sophistication: institutional investors now keenly negotiate fee terms
Enhanced transparency: real management costs are increasingly scrutinized
In this tense context, the emergence of voluntary redistribution of management fees is all the more remarkable as it goes against the general trend toward revenue optimization.
Commitment on Management Fees: A Strong Signal
Players like 🔗 Ring Capital are crossing a new frontier by committing to annually donate 5% of their management fees to their philanthropic funds supporting projects with high social impact.
This decision is even more significant because:
Management fees represent the certain income of GPs (unlike carry which remains hypothetical)
These fees are already structurally constrained and mainly serve the fund's operation
This commitment is long-term, independent of portfolio performance
The New Frontier: When Financial Economy Meets the Economy of Common Good
This evolution reflects a profound transformation of private equity. Funds are no longer just vehicles for financial returns but are becoming catalysts for societal change. This approach distinguishes between:
Funds whose societal commitment is mainly about marketing and greenwashing
Those whose convictions are deep enough to directly impact their economic model and compensation
The Democratization of Alternative Models
What was an exception a few years ago is gradually becoming a fundamental movement. Several factors contribute to this democratization:
Generational pressure: millennials and Gen Z, both among GPs and funded entrepreneurs, inherently value societal impact
Institutional LP requirements: many sovereign wealth funds and pension funds now integrate impact criteria into their allocation processes
Regulation: the evolution of the legal framework pushes for better consideration of externalities
Proof by example: the first funds adopting these models demonstrate that it's possible to reconcile financial performance and impact
The Danger of "Impact Washing" and Distinction Mechanisms
Faced with the popularization of these approaches, the risk of purely marketing-driven adoption is real. How to distinguish the authentic from the opportunistic?
With Transparency of mechanisms: the clarity of redistribution or allocation processes is a reliable indicator essential to creating real trust, in a world where only reputation counts.
A Major Impact: Alternative Financing of Higher Education
This trend could radically transform certain sectors like higher education. Faced with the progressive disengagement of states in financing training programs (with the notable exception of China), philanthropic funds fueled by carry and management fees could become a crucial alternative source for creating new elites.
The Emerging Model of Educational Financing
The transformative potential of these approaches in the educational field is considerable:
Targeted financing: unlike often uniform public subsidies, these funds can precisely target underrepresented populations or highly dynamic and demanding schools
Outcome-based approach: emphasis on results rather than means favors pedagogical innovation
Direct connection with the innovation ecosystem: beneficiaries have privileged access to the networks of contributing VCs
Allocation agility: funding decisions can be made faster than with traditional public mechanisms
Inspiring International Models
Several international initiatives already show the potential of this approach:
In the United States: programs like NewSchools Venture Fund channel part of the carry from several Silicon Valley funds to institutions serving minority populations
In Southeast Asia: hybrid structures are emerging where education funding is directly integrated into the economic model of investment funds
The advantage would be twofold:
Private funding of educational programs, particularly oriented toward minorities to promote diversity in decision-making spheres and thus foster innovation (which comes from diversity)
Increased demand for results in terms of societal impact, with philanthropic contributors expecting a measurable "social return on investment"
Challenges to Overcome
Despite its potential, this model faces several challenges:
Dependence on economic cycles: as carry is linked to fund performance, these funding sources could be volatile
Adapted governance: hybridizing market logic and social mission requires innovative governance structures
Impact measurement: quantifying "social return on investment" remains a methodological challenge
Conclusion: Money as a Revealer of Values
How GPs choose to manage their compensation – both carry and management fees – is probably the most reliable indicator of their true convictions. Beyond speeches and stated intentions, these financial choices reveal their deep vision of the role capital should play in our society.
For Limited Partners, these practices now offer an additional criterion for evaluating management teams: beyond track record and investment thesis, the philosophy of revenue management becomes a differentiating element in an increasingly competitive universe.
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