How Fund Managers Get Paid in 2026: Management Fee, Carry and Hurdles
by Raises.com
A fund manager is paid from three numbers: a management fee charged on what investors put in, a performance fee charged on the profit the deal creates, and a hurdle that moves that performance fee as returns climb. On $1,000,000 that ends the deal worth $2,000,000, a 20 percent performance fee pays the manager $200,000. The fee is charged on the $1,000,000 of gain, never on the $2,000,000 balance.
Most first-time sponsors learn this backwards. They price the fee against the money raised, then discover at closing that the number their lawyer drafted and the number they described to investors are different amounts. Below is the mechanic, in the order it actually applies, using the worked example Natu Myers runs on camera in the Raises.com real estate fund guide.
1. The management fee: paid whether or not you perform
The management fee is a percentage of what investors commit, taken regardless of what you return them. It pays the cost of running the vehicle: the administrator, the audit, the reporting, the asset management hours between acquisition and exit.
Two things about it decide how an experienced investor reads your deal. It is charged on capital, not on profit, so it exists in a flat year and a losing year. And it is the only fee in the structure that is not contingent on your performance, which is exactly why a high one invites scrutiny. An allocator who sees a large management fee alongside a thin performance fee concludes the manager is being paid to hold assets rather than to grow them.
2. The performance fee: paid on the gain, not the balance
The performance fee, also called carried interest, is a percentage of the profit the deal produces. The two terms mean the same thing. A document that uses both is not describing two fees.
Here is the arithmetic that people get wrong. Investors put in $1,000,000. The deal ends worth $2,000,000. The gain is $1,000,000. At a 20 percent performance fee the manager is paid $200,000, because the fee applies to the delta. At 50 percent, which is rare but permitted, the same deal pays $500,000. Change nothing about the asset and the manager's outcome moves by $300,000 purely on the rate written in the operating agreement.
| Management fee | Performance fee (carried interest) | |
|---|---|---|
| Charged on | Capital committed by investors | Profit the deal creates |
| On $1M in, $2M out | Charged on the $1,000,000 | 20 percent of the $1,000,000 gain is $200,000 |
| Paid in a flat year | Yes | No |
| Who carries the risk | The investor | The manager |
| What an allocator reads into it | Cost of running the vehicle | Alignment with the outcome |
| Moves with returns | No | Yes, through the hurdle |
3. The hurdle: the rate is not one number
A hurdle is the return level at which the performance fee changes. It is what turns a single percentage into a ladder, and it is the part that separates a structure an investor will sign from one they will argue about.
The logic is that the better the investor does, the larger a share the manager keeps of the amount above each threshold. A structure of this shape reads as follows.
| If the investor makes | The manager charges |
|---|---|
| 10 percent | 10 percent |
| 20 percent | 20 percent |
| 50 percent | 50 percent |
| 200 percent | 60 percent |
Sitting underneath the ladder is the catch-up, which is an order of payment rather than a rate. The investor is made whole first. Only then does the manager draw their percentage, until they have caught up to the agreed split of what was made. A waterfall that names a percentage without naming the order is incomplete, and it is the single most common defect we see in a first draft written without counsel.
The 80/20, read the right way round
An 80/20 means 80 percent of what the fund makes stays with the investors and 20 percent is taken by the general partner. People reverse it constantly, including in conversation, because the general partner is the one saying the number. The check is the arithmetic above: 20 percent of a $1,000,000 gain is $200,000 to the manager, and $800,000 to the people who wired the money.
The measurement window matters as much as the split. A fund is usually judged over a five-year period, so a performance fee is a claim on what the deal returns across that window, not on a single good quarter. The fund can return 1 percent, 100 percent or 200 percent. The ladder is what decides your share at each of those outcomes, which is why the ladder is negotiated before the first wire and not after the first distribution.
The documents that hold these numbers
Three documents carry the fee mechanics, and investors read them against each other. The private placement memorandum describes the investment, the risks and the economics. The subscription agreement is what an investor signs to come in. The operating agreement governs how the entity runs, and it is where the waterfall, the hurdle and the catch-up actually live.
Two more artifacts make the numbers legible. A pro forma projects what the deal is expected to produce over the life of the hold. A waterfall model shows who is paid, in what order, at each return outcome. Experienced investors read the waterfall before the pitch deck, because the deck describes the opportunity and the waterfall describes what they will receive.
Where Raises.com fits
Raises.com is a fee-for-service capital advisory firm, not a broker-dealer. We build the fund or SPV structure, the private placement memorandum, subscription agreement and operating agreement, a CFA-reviewed financial model and waterfall, and the data room, then run direct outreach to accredited investors and family offices and introduce debt sources. The fee is flat, with no placement fee and no carry, which means we are not a second claimant on the waterfall we help you write.
Clients have raised more than $300 million across real estate, business acquisitions and funds. Thirteen of them are written up in their own words at raises.com/case-studies, including a first-time sponsor who closed a car wash, a triple-net-lease REIT formed under Reg D, and a hotel investor who moved from single-asset deals to an inaugural fund.
Frequently asked questions
What is the difference between a management fee and carried interest?
A management fee is charged on the capital investors commit and is paid whether or not the deal performs. Carried interest is charged on the profit the deal creates and pays nothing if there is no gain. One covers the cost of running the vehicle, the other is the manager's share of the outcome.
Is carried interest the same as a performance fee?
Yes. They are two names for one number, the percentage the manager charges on the profit produced. A document using both terms is describing a single fee, not two.
What is a catch-up in a fund waterfall?
The catch-up is the step after the investor has been made whole, where the manager draws their percentage until they have caught up to the agreed split of the profit. It is an order of payment, not a rate, and a waterfall that names rates without naming the order is incomplete.
What does 80/20 mean in a fund?
Eighty percent of what the fund makes stays with the investors and twenty percent goes to the general partner. On a $1,000,000 gain that is $800,000 to the investors and $200,000 to the manager. The split is reversed in conversation often enough that the arithmetic is worth checking every time.
How long is a fund measured over?
Usually five years. The performance fee is a claim on what the deal returns across that window rather than on a single strong period, which is why the hurdle ladder is agreed before capital comes in.
Do I need a waterfall if I am buying one building?
Yes, if outside money is coming in. The waterfall is what tells an investor what they receive and when, and a single-asset SPV needs that answer as much as a multi-asset fund does. What changes with one asset is the complexity of the model, not whether one is required.
Where to go next
- Independent sponsor fees and carried interest in 2026, the same economics from the sponsor's side of the table.
- Raising capital to buy a business and Reg D 506(c) capital raising.
- The case studies, written by the clients themselves.
- Book a strategy call with one of the advisors. Pricing is on the booking page before you pick a time.