Fund economics are where LPs make their money, GPs make their living, and a surprising number of founders get confused. Understanding the numbers is not optional — it is the language the entire industry speaks.
The fee structure
The classic model is "2 and 20." Two percent annual management fee on committed capital funds operations — salaries, office, travel, legal. Twenty percent carried interest ("carry") is the GP's share of profits above a threshold. That threshold, the hurdle rate, is typically 8% in private equity and often absent in venture. Below the hurdle, LPs get everything back with a preferred return. Above it, carry kicks in, sometimes after a catch-up provision that lets the GP catch up to its 20% share.
The waterfall
This is the order in which distributions flow. European waterfalls return all committed capital plus the preferred return to LPs before any carry is paid — GPs wait years for their first dollar of carry. American waterfalls calculate carry deal-by-deal, which can pay GPs earlier but usually includes clawback provisions so LPs can recover over-distributed carry at fund end. Which one you operate under matters enormously for GP cash flow and LP trust.
Reporting cadence
Capital calls request committed but uncalled capital from LPs when the fund needs it, typically with 10 business days' notice. Distributions return realized proceeds, either in cash or in kind (usually public stock). Quarterly reports include a capital account statement, portfolio company updates, and fair value marks. Annual reports add audited financials. The industry standard templates come from the Institutional Limited Partners Association (ILPA) and have become de facto requirements for serious LPs.
The metrics that matter
IRR (internal rate of return) measures time-weighted return but is notoriously easy to game, especially early in a fund's life when low denominators produce eye-watering percentages. MOIC (multiple on invested capital) is the simpler, blunter truth: how many dollars out for every dollar in. TVPI is total value (realized plus unrealized) over paid-in capital. DPI is the realized-only version — the cash actually returned. RVPI is what is still on paper. Sophisticated LPs look at all four together, with particular weight on DPI once a fund matures. Paper markups pay no bills.
Valuation discipline
Private company valuations are estimates, and estimates invite optimism. Serious managers use ASC 820 or IFRS 13 fair value methodologies, document comparable transactions, engage third-party valuation firms for audits, and resist the temptation to mark up portfolios in quarters when nothing has actually changed.