Management Fee Waiver
(Private Equity Fund)

Summary

This management fee waiver clause for private equity fund (PEF) limited partnership agreements allows investment managers to waive receipt of management fees in exchange for special allocations, which receive more favorable tax treatment. This clause includes practical guidance and drafting notes. Management fees, which are generally paid quarterly or semi-annually, are treated as ordinary income of the investment manager for tax purposes. However, such compensation may be waived in exchange for a “management profits interest”, with receipt deferred for three years or more, resulting in treatment as long-term capital gains if structured properly. The use of a management fee waiver does not increase the amount investors pay for the management fee and has no adverse tax impact on investors. However, it creates the possibility that the investment manager will receive more (or less) compensation than it would have received absent the waiver, as waived amounts are invested in portfolio investments and subject to the risk of profit and loss. This management fee waiver clause is drafted assuming that the PEF is a domestic limited partnership. It requires a corresponding provision in the PEF’s management agreement and revisions elsewhere in the fund’s limited partnership agreement, as detailed in the drafting notes. Note that the legal form and jurisdiction of a PEF can vary, and accordingly, a management fee waiver would need a different structure for offshore funds. See Onshore/Offshore Structuring Issues for Private Equity Funds for a discussion of PEF structuring variations. This clause should be read in conjunction with the practice notes Private Equity Fund Documents: Drafting and Review and Limited Partnership Agreement Drafting for a Private Equity Fund. This clause assumes that it will be included in a PEF limited partnership agreement. See Limited Partnership Agreement for a Private Equity Fund for an example.