Hi {{first_name}},

I learned something driving an investor around St. Louis last year.

He raises billion-dollar funds and distributes through RIA networks, which is how most advisors reach alternatives at all. Somewhere between properties I asked what it would take to get our funds onto one of those platforms.

He told me our fees were too low. Too low for the RIA firms in the middle to make a cut. Without that, nobody downstream has a reason to learn what we do.

Here is what I did not understand at the time.

That payment is real, and it usually sits inside the fund. It is called a shareholder servicing fee. It comes out of fund assets every year, and it gets paid whether the fund performs or not.

The bar is set to be cleared, by people who already know they'll clear it.

Some of our growth equity funds carry a 20% preferred return with an 80/20 split above it. If an asset takes longer than we projected, the investor gets made whole and we get nothing. I’m the second largest investor across our entire portfolio.

So I am not selling you any structures this week. I am telling you the terms are set by people. And you can read what they chose.

This week, what the terms cost you and how to read them before you wire:

— Walker Deibel
WSJ & USA Today Bestselling Author of Buy Then Build
Founder, Build Wealth

Two funds hold the same assets and lean on the same manager. One returns 13.5% a year. The other returns 12.7%.

On a million dollars over ten years, that gap is worth about $242,000.

The difference is in how the money gets deployed. The evergreen fund stays about 90% invested all the time. The other is a ladder of traditional drawdown funds, timed so that as one winds down the next starts calling capital, keeping you near that same 90%. We named this category Continuous Capital back in January and walked through how it works.

The numbers come from Greg Brown and William Volckmann at the Institute for Private Capital, the research arm of UNC's Kenan-Flagler business school. In a June 2025 paper, they ran ten thousand simulations of each approach, calibrated to buyout returns, changing nothing but the deployment path.

The wrapper itself is worth about a quarter million on a seven-figure allocation over a decade.

Where the doubling claim comes from

There is a third fund in that paper, and it is the one showing up in marketing decks.

A single drawdown fund, committed once and never repeated, returns 6.5%. Set that against the evergreen's 13.5% and you have a headline about doubling your money.

Brown and Volckmann built that case as a floor. It describes an investor who commits once, waits years to get the capital back, and leaves the balance in cash the whole time. They call it a straw man in the paper.

Look at what the beta tells you. The evergreen fund runs 0.91 against public markets. The single drawdown fund runs 0.31.

An allocator who wrote that check believed they had bought private markets exposure. They were holding about a third of it. The rest of their money spent the decade in cash while the statement said private equity. The ride felt smooth the whole time, because a portfolio that is barely invested does not move much.

That is the fund the two-to-one comparison uses as its baseline. Anyone running a real commitment program is in the 12.7% column.

The volatility that comes with it

Now the trade.

Annual return volatility runs 2.2% for the single drawdown fund, 4.3% for the paced ladder, and 5.0% for the evergreen fund.

The evergreen fund is the most volatile of the three. Your money stays fully at work, so more of the market reaches your statement. That is the honest trade.

The middle number is the interesting one. The paced ladder swings its invested percentage around 20%, yet still posts lower return volatility than evergreen — which Brown and Volckmann flag as counterintuitive. The reason is drift. The ladder is sometimes sitting on cash it cannot deploy yet, sometimes borrowing to meet a call it cannot cover. That wobble blunts good market paths and bad ones alike, and the range of outcomes narrows.

So the calmer number is drift showing up in the measurement. Evergreen sits at target every period and takes each move at full weight. The ladder buys its steadier numbers with exposure nobody chose.

Four lines that price a wrapper

There are four lines that tell you what a wrapper actually costs you.

Line one: What you get paid.

Line two: What the liquidity sleeve costs. A typical evergreen fund holds 10 to 20% of assets in liquid instruments so it can honor redemption windows. That reserve is the price of the quarterly door, and it is already inside the 13.5%.

Line three: What the fee table states. 

Line four: What the whole structure guarantees. This one takes a minute.

The line the simulation leaves blank

Brown and Volckmann leave fees out of the simulation entirely. They say so plainly and then flag it as worth a separate look.

Line one is a pre-fee number. Anything the wrapper charges above what a drawdown program charges comes straight out of that $242,000.

A couple weeks ago we mapped the Fee Stack. Showing every layer between your check and the deal, and what each one accrues on. This charge sits outside that stack. It is described as conditional, and the question is whether it ever is.

Remember that everything mentioned above runs on buyout numbers, because that is what the simulation referenced used. Most evergreen money sits in credit — business development companies (BDCs) and interval funds — where the fee works differently.

The hurdle that can always be cleared

Semiliquid private credit funds lend at floating rates. A spread over SOFR, repricing as the reference rate moves. Across a large sample of BDC loan portfolios, roughly 88% carry floating rates.

The incentive fee on those same funds triggers at a fixed hurdle. A stated return the manager has to clear before taking a share of the upside.

Put the two together. These funds generally lend at spreads at or above their own hurdle rates, so the fee collects in nearly every rate environment the portfolio can hit.

In 2021 policy rates sat near zero for a full year, the hardest environment a performance fee on a floating-rate book could face. Morningstar found that nearly every listed BDC cleared its hurdle that year on income alone, before any incentive fee, and that the same funds would have cleared the 5% hurdle common to semiliquid funds even easier.

A fee you pay in every rate environment is a management fee with better marketing.

Then there is the base the hurdle is measured against. When FS Specialty Lending listed in 2025, it moved its hurdle from a percentage of "adjusted capital" to a percentage of net assets and told shareholders the switch would make it more likely that income clears the hurdle. The loans didn't change. The denominator did, and the fee got easier to earn.

On the equity side, an evergreen private equity vehicle charging over a hurdle is running a real contingency. Its returns are not contractual, so the fee can go uncollected. Credit is where the hurdle stops being a hurdle.

Two disclosure standards, one comparison

Morningstar went through SEC filings and found that more than half of unlisted BDCs leave the incentive fee out of the prospectus fee table, even though they almost always collect it, and even though the terms across the category are nearly identical.

The filing rationale is that a manager cannot predict whether the fund will clear the threshold, so cannot state the fee in advance. 

Morningstar pushed for better disclosure in early 2026 and a number of funds updated their prospectuses. Others did not. So you are comparing across two standards at once. A fund that discloses its incentive fee reads as more expensive than an identical fund that hides it, and some headline expense ratios have risen over the past year for reasons that have nothing to do with what the funds charge.

Line four does not appear in the document. It still gets paid. Get it in dollars. 

The incentive fee the fund collected last year, against its net asset value, in a number you can put in a spreadsheet. A manager who cannot produce that in a sentence has told you something.

Assume you will pay it.

If the wrapper is worth eight tenths of a point a year, it's no surprise the money is moving. Evergreen assets have roughly doubled since 2022. Our team broke down what's driving the move. View the report.

Between the hurdle and the manager's stated share sits a catch-up. Once income clears the hurdle, the manager takes the entire excess until their cut reaches the stated percentage of all income. Blackstone described the purpose in a registration statement for one of its credit funds. The catch-up hands the advisor roughly 12.5% of income as though the hurdle were never there.

So compare two funds, one with a 5% hurdle, one with a hypothetical 7%. Here is what the extra two points buy the investor.

The advantage is tucked into a narrow band and worth at most 0.875 points, at exactly 7% income, and gone above 8%. A rate cut lowers your yield and slides you left, back to where the hurdle you negotiated starts to matter again.

To find your own line, divide the hurdle by one minus the incentive rate. Above that number, your hurdle is simply decoration.

Everything in this issue is knowable before you commit, which is why your diligence hours belong here. A manager's skill takes three funds and a decade to judge, and by then your money is already in. The terms sit in a document you can read this afternoon. There’s four questions you should ask.

1. What is the preferred return, and is it fixed?

Nearly every one you will see is a flat number. Ask anyway, then ask what share of the loans float.

A fixed hurdle over a floating book is a bar the fund grows into. One question surfaces the whole mechanism.

2. Is there a catch-up, and where does it complete?

Almost no fee table displays this, which makes it the widest gap between what a schedule prints and what a fund charges.

Divide the hurdle by one minus the incentive rate. Above that number, your preferred return has stopped affecting the split.

3. What did it cost last year?

Ask for two numbers. The incentive fee collected in dollars against net asset value, and the fund's borrowing cost over the same period.

That second one is the number nobody asks for. Blackstone's private credit fund, the largest of its kind, runs total annual expenses of 7.07% on its institutional class and 2.82% once you strip out interest on borrowings. Leverage costs 4.25 points a year, more than every fee in the fund combined.

It comes out of your return the same way a fee does. It rarely appears in the conversation.

4. Which class am I in, and what would the next one cost?

That same fund publishes what each of its three share classes costs.

Class I and Class D run through the same channel, wrap accounts and RIAs, on identical fund terms.

The difference is a distribution fee. Class D holders pay 0.25% a year in stockholder servicing. Class I holders pay none, and the only thing separating the two is a minimum of one million dollars against twenty-five hundred.

So that quarter point pays for the channel, and the exit from it is the size of your wire.

Twenty-five basis points sounds small until you set it against what this issue has been measuring. The structural advantage of a continuous capital vehicle is eight tenths of a point a year in return. This is a quarter point in cost, which is a different kind of number, and it lands in the same place. A tier inside one fund moves your outcome by a meaningful fraction of what the entire structure is worth.

Find out where your thresholds sit and what the next one requires. Ask for it, because nobody offers it.

What to do with the answers

You want a fund whose terms you can state in one sentence after asking.

If the incentive fee is disclosed, the catch-up is stated, the borrowing cost is available, and the class thresholds are explained, you are dealing with a manager who expects to be asked. That tells you something no track record does.

If four straightforward questions produce hedging, you have learned what you needed before the wire rather than after the K-1.

A hull gathers barnacles regardless of whether a ship races or sits at anchor. Barnacles ask nothing of performance. They just accrue, and they drag.

Fees are the same. The structure a fund is built in is worth eight tenths of a point a year. The terms sit on top of that, and they are set by people with their own reasons. All of it is in a document you can read before you wire.

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This is not financial advice. Illustrative output of a reasoned thought experiment. Not a backtest, guarantee, or prospectus. Actual results vary based on market conditions, fund selection, timing, fees, taxes, and factors not modeled. Private credit, CRE, and leveraged strategies involve significant risk including loss of principal. Consult a qualified financial advisor.