Other Fees & Overlooked Layers
In our “Understanding Fees: Beyond the Headlines and into the Footnotes” article, we provided an overview and checklist of the various fees and expenses typical in evergreen funds. This piece focuses on the "other" fees beyond management and performance charges.
While management and performance fees often take center stage, evergreen funds include additional expenses that can significantly impact net returns over their perpetual lifespan. These stem from operations, leverage, regulatory needs, and fund design – varying by whether the fund is single- or multi-manager, or uses leverage. Unlike incentive-based fees, these are typically passed through as reimbursable expenses.
Administrative and Operational Expenses: Day-to-Day Overhead
These cover ongoing costs like accounting, auditing, legal, compliance, custody, transfer agency, and reporting. In evergreen funds with frequent NAV calculations for subscriptions and redemptions, they typically range from 0.1% to 0.5% of NAV annually, higher in complex or smaller funds.
For structures like Business Development Companies (BDCs) under the Investment Company Act of 1940, regulatory filings add to the burden. Valuation fees are a key subset, often overlooked – independent appraisals are ideal to avoid manager biases, especially in illiquid assets. Check for expense caps (e.g., 0.25% of NAV) and exclusions for extraordinary items like litigation, which could cause unexpected increases.
Leverage-Related Expenses: Borrowing Costs and Hidden Fees
Evergreen funds often employ leverage to enhance returns, but this introduces interest expenses on borrowed funds, which are typically borne by investors. Rates can fluctuate with market benchmarks like SOFR, adding 1-3% or more to the TER in leveraged vehicles like BDCs. These costs are not "fees" per se but direct expenses that reduce net returns, especially in rising interest rate environments. Review the fund's leverage ratio and debt terms to assess if the potential upside justifies the added drag – funds with high leverage may amplify volatility without proportional benefits.
Acquired Fund Fees and Expenses (AFFE): Layered Costs in Multi-Manager Setups
In multi-manager evergreen funds (e.g., fund-of-funds), AFFE captures underlying funds' management, performance, and other charges, typically adding 0.5-2% annually. Pure secondaries or fund-of-funds models tend to have higher AFFE, while co-investment-heavy funds may mitigate this by accessing deals on a no-fee basis. Investors in such structures should evaluate the net-of-fees performance projections to ensure the diversification benefits outweigh the compounded expenses.
Organizational and Offering Expenses: Setup and Launch Costs
These include initial legal, registration, and marketing fees, often amortized over 3-5 years. In new evergreen funds, they might dilute early returns if passed through; some managers absorb them.
Look for clear amortization schedules and caps to ensure fairness – perpetual structures shouldn't disproportionately burden early investors. Placement or agent fees (e.g., for distribution) may also apply, typically adding 1-2% upfront in some cases.
Subscription and Redemption Fees: Managing Liquidity Flows
To handle inflows and outflows in evergreens, subscription fees (e.g., 1-2% of investment at entry) cover onboarding, while redemption fees (e.g.,0.5-2% of investment at exit, often tiered or declining) deter short-term exits and protect remaining holders from dilution. Evaluate against liquidity provisions like redemption gates and check for waivers or declining scales to minimize penalties.
Summary
The “other” fees in evergreen funds – passed-through expenses beyond management and performance charges – can materially shape net returns over time.
Key drivers include administrative and operational costs (accounting, audit, legal/compliance, custody, transfer agent, frequent NAV/valuation work), leverage-related borrowing costs tied to benchmarks like SOFR, multi-manager layers captured as AFFE, organizational/offering expenses amortized over early years, and liquidity frictions such as subscription and redemption fees. Investors should assess the all-in expense ratio (including leverage and AFFE), confirm expense caps and exclusions, review amortization schedules, and scrutinize leverage terms and liquidity provisions for fairness.
Well-disclosed, capped, and scalable structures help ensure these necessary costs support durable stewardship rather than unduly eroding compounding.