Trust but verify: Case studies of fee validation in practice

By Paul O’Shea, Richard Stratford and Chris Chung


Over the past 5 years, private asset limited partners have done a phenomenal job of focusing their attention on the costs and charges associated with the asset class. They understand that the economic terms agreed in the limited partnership agreement (LPA) have operational consequences which need to be proactively managed through ongoing due diligence. We perform fee and carry validation on thousands of funds each year. In this technical article, we outline some simple case studies on why fee validation is important, based on our real experience and findings. The case studies highlight the interplay between intent, interpretation and mathematical accuracy. As we say, Fee Validation is not a ‘GP Gotcha’, but an important pillar of ongoing due diligence and audit control within limited partner organisations. It should always be performed in a manner that is considered and respects the inherent spirit of the GP/LP partnership. We hope that these case studies prove valuable as you look to implement your own program and framework.

Case study #1

Global Private Equity Buyout Fund


Global Private Equity Buyout Fund is a private equity fund with a vintage of 2008. The Fund was set to liquidate in Q1 2020. Colmore’s FAIR analysis was conducted in Q1 and Q2 of 2019 on behalf of an LP with a commitment size of USD105 mm out of a total fund size of over USD1.0 bn.


Global Private Equity Buyout Fund was analyzed within the scope of FAIR for Q1 2019.

The Fund applies a European waterfall as follows:
  1. 100% to the LP until the cumulative distributions is equal to the capital contributions
  2. 100% to the LP until they receive distributions that render an IRR of 8% per annum
  3. 100% to the GP until the GP receives distributions equal to 20% of the gains distributed to the LPs and GP
  4. 80% to the LP, 20% to the GP thereafter

We initially engaged with the GP to provide Fee and Carried Interest information at the required granularity needed for analysis. As the fund had so far failed to return to the investor an amount equivalent to the required preferred return, any carried interest taken by the GP at that point had been accrued rather than paid to the GP. It was also observed that the Fund had reported a Net IRR of 7.9% as of Q1 2019. As such if the fund’s IRR matched that of the investor, at that point the GP should not have been accruing for carried interest. However, the LP’s capital account statement did show accrued carried interest. Upon running an IRR Analysis utilising the Client LP’s cash flow data on an inception-to-date basis it was observed that the Net IRR was just above the hurdle rate at the Investor-level, so the Fund was still accruing for carried interest. As the allocation basis of the Carried Interest Waterfall is at the investor-level, we were comfortable that the GP was accruing Carried Interest.

To model the expected carry for our LP, we took all previous CFs the LP had either contributed to or received from the fund and the residual value of the fund as per that quarter’s capital account statement and ran this through an internal model. This number was then compared to the carry number provided by the GP. The resulting output of the model was initially derived as follows.

For Global Private Equity Fund, the Carried Interest Waterfall Examination model utilised the following inputs: Continued…


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