Hi {{first_name}},

Before Build Wealth was a company, it was an experiment to learn how to identify the better terms.

It began as a handful of SPVs I built to tackle the carry arbitrage sitting inside funds I was already investing in personally. Inside a single fund, the deal was identical for everyone though the carry wasn't. A bigger check or a better relationship bought a lower fee and a better share class. So I pooled our commitments to qualify for the terms reserved for size, then split the improvement back to the investors so we all earned more. Identifying and removing those layers of fees is what this issue is about.

Last week we looked at data that showed how smaller funds outperform larger ones. But that issue left a question open behind it. How do fees eat into a fund's return, no matter its size, and no matter how strong the underlying deals are?

It's a question that helps identify where the returns are best. The small end of the private markets has been the strongest-performing band private equity tracks. But strong returns at the deal level mean nothing if the fees between you and the deal swallow the difference before it reaches you.

The gap between what a deal earns and what eventually reaches your account is what I call The Capture Gap. Two investors in the very same deal can earn the very same return and still end up with meaningfully different amounts.

This week I'm breaking down where those return dollars actually go, including:

A fund earns a return at the deal level. That’s the gross return. What reaches your account is a smaller number. That’s the net return. The gap between the two is created by fees.

It’s The Capture Gap.

The gap can also change its size from one person to another. Two people can own the identical deals in a fund and pay two different amounts to get there, and nothing requires the fund to let them know.

Since 2009, deals in the lower middle market ($25 million to $100 million in enterprise value) have returned a pooled 39% gross IRR and 3.3x TVPI. That’s the highest of any size band PitchBook tracks. The figure only counts realized or partially realized deals, so it leaves out whatever still sits unsold on a mark. The advantage is real. There aren’t any guarantees as to how much of it survives the journey to your account. But there are three categories that can help you anticipate it. The tier you land in, the layers you route through, and a headline rate that hides more than it shows.

The Tiering

How one fund charges two prices.

In 2024, two experts found the proof that the capture gap was unique from person to person. Stanford's Juliane Begenau and Harvard's Emil Siriwardane published their findings. 

Working from cash flow records across thousands of fund-investor pairs, they found that inside a single private equity fund, different investors pay different effective prices for the exact same portfolio of deals.

The spread within one fund ran to 91 basis points on the management fee and 5.8 percentage points on carried interest.

Two investors sit in the same fund holding the same companies, and their economics diverge based on the tier each one landed in.

The data comes from U.S. public pensions, the most sophisticated buyers in the asset class, with dedicated staff and real negotiating leverage. If pensions with that leverage still land at different tiers inside one fund, the individual investor almost certainly faces a wider spread. The paper from Begenau and Siriwardane doesn't measure that directly, so hold it as an inference.

This is tiering. Most GPs run two or three fee schedules from the outset and assign each investor to one based on check size, relationship, or timing. You rarely learn which tier you landed in, because nothing requires the fund to say.

The tiering isn’t vindictive or malicious by nature. It has a legitimate reason to be there. Servicing a $50,000 commitment runs the same capital calls, K-1s, and compliance overhead as a $5 million one, at a far higher cost per dollar managed. Smaller checks genuinely cost more to administer. The reason holds, and the outcome still stands: the investor with the least negotiating power pays the most for the same deals.

The Stack Between You and the Deal

Each layer charges a toll.

Every dollar that reaches a private deal runs a gauntlet.

None of the layers are a secret. But they don’t show up together all in one place. And certainly not before you write the check.

Consider this example. Take a $100,000 commitment in a fund returning 3.3x gross. On paper that’s $330,000.

The fund's own layer goes first. A standard 2-and-20 takes 20 percent of profit as carry and roughly 2% a year to manage. Profit is 2.3x, so carry alone removes about 0.46x, and a ten-year fee load takes another 0.2x. Your $330,000 is now closer to $264,000. Nothing has stacked on top yet.

Add the feeder at 75 basis points a year over the same ten-year hold, roughly $7,500 more, and you're at about $256,500. A fund-of-funds layer, where one exists, takes its own cut from there.

These figures are generous. They assume standard terms and skip the preferred return most 2-and-20 funds apply before carry kicks in, which pushes the real number a little higher, not lower. 

The direction never changes. Every layer is one more hand in the return before it reaches yours.

The Paradox of the Falling Rate

Lower rates don’t mean less return.

This is a critical finding.

Recent vintage data from Preqin shows funds that closed in 2025 charged a mean management fee of 1.61%. That is the lowest rate the industry has ever recorded, driven almost entirely by capital moving into funds above $1 billion. Middle-market and smaller managers held closer to the legacy 2%. Bigger funds charge lower rates.

Lower rates, though, don't mean less money. Run the two side by side:

The smaller rate produces the larger number by a factor of more than twenty. That $80 million covers research, operations, and the cost of running a fund at that scale. But scale creates its own pressure. A $5 billion fund can't build a portfolio one $10 million deal at a time, so it has to write bigger checks, which means bidding for bigger companies. Bigger companies get bid up. More buyers can underwrite them, more capital chases them, and the price reflects it. That's the mechanism behind last week's math. The entry price sets your ceiling, and size is what pushes the entry price up.

Which is the other half of last week's lesson. Buying small only pays if the layers between you and the deal don't absorb the difference first.

So small is mighty, and higher fees don’t statistically waste that away either.

The Weight of Your Check

Your check size decides your return tier before a fund is even open. Before you ever saw the deal. And it makes sense.

You’ll also come across funds that keep that schedule out of sight. You land in a tier, you wire the money, and you never see the one the larger investor got. The rare fund publishes its classes in the open, every tier and every term visible before you commit. Set a $50,000 commitment next to a $5 million one on the same schedule, and the gap comes into full view.

Aspen Funds has spent eleven years building an operating track record across credit, energy, and real estate. That's tenure across enough cycles and asset types to show how a sponsor actually operates.

Aspen has been a Build Wealth partner since the beginning and Walker invested with them personally before Build Wealth existed. The relationship is strong and ongoing. When it comes to those rare funds that champion transparency and practice what they preach, Aspen illustrates the lesson. The returns, the fees, the tiers, all put in writing, in materials built to be read by anyone weighing an investment. 

Example 1

Aspen's private credit fund is open-ended and income-focused, lending against commercial real estate through preferred equity, mezzanine debt, and bridge loans. It offers three share classes, and the terms are laid out plainly across all three.

Most of the terms move with every step up in the classes. The fee moves only once, dropping from 2% to 1.5% between Class A and Class B, then holding flat into Class C while the promote and preferred return keep climbing on their own. Nothing about the underlying loans changes between classes. 

These are targeted returns, not audited results. And compounding a midpoint estimate over five years means the five-year figure is a projection built on a projection. Held loosely, here's the spread in dollars. A $100,000 commitment at Class A's 11% midpoint compounds to roughly $168,506 over five years. The same $100,000 at Class C's 13% midpoint reaches roughly $184,244. That’s about $15,738 of daylight, on identical capital, in the identical fund, with the only difference being which class held it.

Example 2

This is a different fund, a different asset, and a different lever doing the very same job. Their most recent Energy Fund runs one fee schedule for every investor. What varies is the price of the unit. Par for a standard commitment, a discount for size, and the discount protected by priority in the payout waterfall before the standard split resumes. Standard terms target 25–30% net annual returns. The large-investor tier targets 28–33%, on the same wells, the same operator, the same period. Again the sponsor's own targets, not audited results.

Two funds, two asset classes, two entirely different mechanisms, fee rate in one, unit price and payout priority in the other. Same shape of outcome in both. The investor with more capital or more patience nets more than the investor without either, on assets that performed identically underneath them. That consistency is what makes this systemic.

And none of it is a flaw in how Aspen runs money. Pricing return by commitment size and duration is standard, disclosed, and fair, since larger and longer commitments genuinely cost less to service, enable a fund to execute faster, and tend to carry less overhead once placed. The problem this issue has been tracing is a different one. Most sponsors keep this pricing private. Aspen publishes with transparency..

That inverts the usual complaint. General solicitation under Rule 506(c) doesn't require a sponsor to disclose class terms anywhere public. A Form D carries no fee schedule and no waterfall. A sponsor can advertise broadly and keep its actual pricing private, and most do. Aspen didn't have to put either table in front of a prospective investor. It chose to, and that choice is exactly what this issue is telling you to go looking for.

How Build Wealth Participates

The Capture Gap provides an opening for arbitrage and Build Wealth was built partly to help investors actually capture it.

The better tiers in both funds sit behind a hurdle that most individual checks can't, or shouldn’t, clear alone. BuildFlow I pools commitments from the Build Wealth community to reach the Aspen Private Credit Fund's Class C at minimal cost. BuildEnergy I does the same against 51 UEF VII's large-investor tier. Aggregate enough smaller checks into one larger one, cross into the better terms, and share the improved economics back through to LPs. 

It's almost the same arbitrage available to anyone who could write the $5 million check directly. Build Wealth just runs it at a scale that lets people without one reach the same line.

Our own realized numbers can be shared in a direct conversation. To see how these economics have actually performed for Build Wealth investors, reply with FLOW and we'll take you behind the curtain. 

You might expect competition to have closed this gap by now, but it hasn’t. The private markets remain in early innings to individual investors. They are by nature private. It’s still opaque and fragmented.

As we’ve underscored, the fee and return split your investment gets is set when the fund is built. Understanding them helps you understand the structure of the fund. So here’s five questions that can be asked before you send a wire.

1. How many layers sit between your check and the deal?

Count them by name. The fund itself, any feeder or platform sitting on top of it, and any fund-of-funds wrapper sitting on top of that. Each layer is a fee, and each fee is a claim on the same pool of returns before any of it reaches you. Two investors can hold the identical portfolio, one through a single layer and one through three, and walk away with very different numbers.

2. What does each fee accrue on?

There are three common answers, and they produce three different bills. A fee on committed capital runs whether or not the money has been deployed yet. A fee on invested capital only applies once it's working. A fee on NAV steps down as the fund winds toward its end. Same headline rate, and the basis it's calculated against is rarely printed next to it.

3. Is there more than one tier, and does the fund grant MFN rights?

Tiering doesn't always show up as a fee. Sometimes it's priced into the unit itself, where an early or larger commitment buys in at a discount to the standard price, with that discount protected through the waterfall before the standard split resumes. 

So ask it straight. What tier am I on, and is there a better deal for a larger or earlier commitment?

Then get it in writing. If the better terms aren't in the paperwork you can actually read, you don't really have them, no matter how good the conversation felt.

Lastly, ask one more thing. Does the fund offer Most Favored Nation rights, and above what size? MFN means if another investor negotiates a better deal, you get it too. It's the one lever that can move you up a tier after you're already in, but only if you ask before you sign.

4. What does it cost to sit on money you've promised but haven't sent?

When you commit to a fund, they don't always take all the money at once. They call it in over time. But some funds charge you on the full amount you promised from day one, even the part still sitting in your own bank account.

Say you commit $100,000 and they've only called half. At a 2% fee, you're paying about $1,000 a year on the $50,000 you haven't even sent yet. Over three years that's roughly $3,000, all of it on money you still control and could have put to work somewhere else. Ask what you're charged on, and when.

5. What happens to your money when it's time to get out?

If you're invested through a feeder or a platform instead of directly, you might not get paid back on the same schedule as the big direct investors. And if you ever need to sell early, going through that extra layer can mean taking less for your position. Ask what getting your money out actually looks like from where you sit, not from where the fund sits.

Cutting a layer cuts its fee. But be honest about what that layer was doing for you in exchange. Sometimes it's dead weight. Other times it's providing real due diligence, negotiating leverage, or access, and a feeder that gets you into a manager you couldn't otherwise reach, at a fee that's disclosed and fair for what it buys, can still be the right call.

Going direct isn't a free win either. It runs the fewest layers, but it puts the most selection risk on you personally. At the small end that risk widens in both directions, with more outright winners but also more outright losses than you'd find further up in size.

So the audit leaves the layers where they are. It changes whether you learn what each one costs before the wire goes out, or after the K-1 shows up.

— John Bogle in his testimony before the U.S. House Financial Services Committee, 2003.

Bogle also said you get what you don't pay for. He meant index funds, where every cost is printed and a cheaper option is one click away.

Private markets reward going direct. The fee you're quoted is the tip of the iceberg while additional layers can sit hidden out of sight. 

The size of your investment decides your shareclass. Make sure to understand every layer of fees standing between you and the asset before you decide to invest or not. An extra layer doesn't automatically mean you'll underperform, but as an individual investor, it's often the right call to cut out as many middlemen as you can.

Did this land in your inbox via a friend or colleague? Subscribe to get your own weekly insight into private markets.

Already a reader? Help other investors open their eyes to the private markets and forward this to someone who would value the insight. Or hit reply to tell us what you think.

By continuing to receive the Wealth Stack newsletter, you acknowledge and accept our Privacy Policy, which includes the sharing of subscriber engagement data with select advertising partners.  

To unsubscribe, click here.

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.