Institutional Asset Allocation, Fund-of-Funds & Fee-Drag Economics
Fund-of-Funds Double-Layer Fee & Carry Net-TVPI Formula
Compare Direct Primary LP Net TVPI against Private Equity Fund-of-Funds (FoF) Two-Layer Fee & Carry Net TVPI, Cumulative Two-Tier Fee/Carry Leakage ($M), and End-Investor Gross-Gain Capture Ratio.
Quantify two-tier fee and carried-interest compounding in Fund-of-Funds allocations!
Smaller family offices and foundations often access oversubscribed venture and buyout managers via a Fund-of-Funds (FoF)—yet Investment Committees must benchmark the diversification benefit against Two-Layer Fee & Carry Drag! First, underlying GPs deduct Underlying Cumulative Management Fees and charge Underlying GP Carry (typically 20% on net underlying gains above Paid-In Capital), yielding Direct Primary LP Net Value! Second, the FoF manager deducts Top-Layer FoF Cumulative Management Fees (e.g., 50 bps/yr = ~5% over life) and Top-Layer FoF Incentive Carry (e.g., 5% on net FoF gains above LP Paid-In Capital), compressing Final FoF Investor Net TVPI and Gross-Profit Capture!
Verify on a $100M Allocation—LP_Paid_In_Capital = $100.00M (B2), Gross_Underlying_Deal_Value = $240.00M ($140.00M gross gain, B3), Underlying_GP_Cumulative_Fees = $15.00M (B4), Underlying_GP_Carry_Rate = 0.20 (20% on $225M - $100M = $25.00M carry -> $200.00M Direct LP Net Value = 2.0000x Direct Net TVPI in E2, B5), FoF_TopLayer_Cumulative_Fees = $5.00M (B6), and FoF_TopLayer_Carry_Rate = 0.05 (5.0% on $195M - $100M = $4.75M FoF carry, B7): Final FoF LP Net Value is 195.00 - 4.75 = $190.25M, or 1.9025x Net TVPI (E3); Total Two-Layer Fee & Carry Leakage is 240.00 - 190.25 = $49.75M (E4); and End-LP Gross-Gain Capture Ratio is 90.25 / 140.00 = 0.6446 (64.46% in E5)!
| FoF vs Direct Metric ($100M PIC, $240M Gross, $15M/20% GP + $5M/5% FoF) | Formula | Verified Output |
|---|---|---|
| Direct Primary LP Net TVPI (x) | (Gross - GP_Fees - GP_Carry) / PIC | 2.0000x |
| FoF Investor Final Net TVPI (x) | (Direct_Net - FoF_Fee - FoF_Carry) / PIC | 1.9025x (2.0000x @ 0 FoF Layer) |
| Total Two-Tier Fee/Carry Drag ($M) | Gross_Value - Final_FoF_LP_Value | $49.75M ($40.00M @ 0 FoF Layer) |
| End-LP Gross Gain Capture | (Final_FoF_Value - PIC) / (Gross - PIC) | 0.6446 (64.46%; 0.7143 Direct) |
Fund-of-Funds Two-Layer Net TVPI Formula
Validate PIC > 0, Gross_Value > PIC, non-negative fee pools, and valid GP and FoF carry rates in [0, 0.50)!
=LET(pi_c, B2, gr_v, B3, gp_f, B4, gp_c, B5, ff_f, B6, ff_c, B7, IF(OR(pi_c <= 0, gr_v <= pi_c, gp_f < 0, gp_c < 0, gp_c >= 0.5, ff_f < 0, ff_c < 0, ff_c >= 0.5, gr_v - gp_f <= 0), "Invalid FoF Fee Model", LET(u_pre, gr_v - gp_f, u_net, u_pre - MAX(0, (u_pre - pi_c) * gp_c), f_pre, u_net - ff_f, f_net, f_pre - MAX(0, (f_pre - pi_c) * ff_c), ROUND(f_net / pi_c, 4))))Zero-Overlay Direct Co-Investment / Primary Check (Set FoF Fee = $0, FoF Carry = 0%)
Set B6 = 0 and B7 = 0: FoF Net TVPI E3 matches Direct LP Net TVPI 2.0000x identically, Total Leakage E4 drops to $40.00M, and LP Gain Capture E5 rises to 100 / 140 = 0.7143 (71.43%)!
=IF(ISTEXT(E3), E3, ROUND((E3 * B2 - B2) / (B3 - B2), 4))Try the example
Use the original values or change them to test your understanding.