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Standard private funds charge a 'two and twenty' model—taking a 2% annual management fee plus 20% carry on profits. Dan Fleischmann skips the 2% management fee entirely across $56 million raised, covering accounting, legal, and operational costs himself. Because investors only pay 20% on actual gains, he forgoes immediate fee income to foster trust across a network of 2,200-plus investors.
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To democratize venture capital, ARK created a fund that eliminates the traditional 20% carried interest (a share of profits). Instead, it charges a flat 2.75% management fee. This structure aims to give retail investors with as little as $500 direct access to premier private company cap tables without the performance fees that typically benefit fund managers disproportionately.
The SEC prohibits traditional 20% carry for retail funds but allows a 'fulcrum fee'—a two-way performance fee. Managers can take 20% of the upside only if they also agree to pay for 20% of the downside, creating true financial alignment and reciprocity with investors.
To participate in highly competitive late-stage deals, some VCs organize SPVs without management fees or carry. While not directly profitable, this helps the startup fundraise, strengthens the relationship, protects the VC's original investment, and signals access to LPs for future funds.
Co-investing offers 'structural alpha.' By participating in average deals with average private equity managers but without paying management fees or carried interest, an LP's returns are mathematically lifted to a top-quartile level. This inherent advantage exists before any deal-specific underwriting.
Asset managers collect a fixed management fee regardless of performance, ensuring stable revenue. They also earn a large percentage of profits (carried interest), creating immense upside potential. This combination makes it one of the most resilient and profitable business models.
To differentiate, CAZ eliminated management fees, getting paid only from a share of profits. They also messaged that they were the largest investor in their own deals. This created powerful alignment, assuring clients they only win when the client wins.
While fund fees are scrutinized, the most problematic fee structures exist in Special Purpose Vehicles (SPVs). These syndicates can charge opaque, multi-layered management fees ranging from 4% to 10%, creating an almost "criminal" situation for the long tail of investors who may not understand the true cost.
Kevin Ryan intentionally keeps his VC funds small. He states large funds focus on the 2% management fee (asset accumulation), whereas his firm focuses on the 20% carry (performance). This structure ensures the team is incentivized to build successful companies, not just manage a large pool of capital.
To ensure "radical alignment," solo capitalist Oren Zeev pays himself zero from management fees, reinvesting 100% back into his funds. As the largest LP in every fund and with a 30% carry, his entire economic incentive is tied to long-term value creation, not fee generation, which is highly unusual.
The fund's 2.5% annual fee on assets under management (AUM) rewards managers for increasing the fund size, unlike the traditional 20% carry model that rewards high returns. This creates a different incentive structure focused on sales rather than investment success.
