Headline economics are easy to quote. Understanding what fees actually cost you in net IRR terms takes a little math.
The fees
Closing fee (paid once, two to four percent of equity), annual management fee (paid by the portfolio company, one to three percent of EBITDA), and promote (paid only above the preferred return).
Effective drag
On a typical five-year hold with 8 percent pref and 25 percent promote, total fee drag from gross IRR to net IRR is usually three to five percentage points. A deal that grosses 25 percent IRR delivers 20 to 22 percent net.
What to compare
Always compare deals on net-to-investor terms. Two sponsors quoting identical promotes can deliver materially different net economics depending on how transaction and management fees are credited against promote.
If you are evaluating a transaction in this space and want a candid second look, Solender Capital is happy to compare notes. Reach out through our contact page and share what you are working on.