The management fee mistake.

Most independent sponsors price the management fee on enterprise value.

It feels right. EV is the big number. The LP sees it. The math is clean. It is also a quiet penalty on every add-on the platform completes.

Here is the mechanic. The independent sponsor closes the platform deal at a $50M EV. The management fee, priced at 2 percent of EV, is $1M per year. Reasonable. The LP signs the LPA. Wire moves.

Eighteen months later, the independent sponsor closes an add-on for $15M EV, funded mostly by the existing senior credit facility's accordion. The new EV is now $65M. The management fee at 2 percent of EV is now $1.3M per year. The sponsor's firm just got a $300K raise for closing an add-on that was largely paid for with borrowed money. The LP sees this. The LP feels it.

Now the inverse. Price the management fee on invested capital instead. The platform deal has $25M of LP equity. The fee at 2 percent of invested capital is $500K per year. The add-on adds $5M of LP equity. The fee goes to $600K per year.

The fee scales with what the LP actually contributed, not what the lender contributed. The sponsor has a smaller starting fee but a fee that grows with LP value created.

Two notes on implementation. The conversion is not just a number swap. It changes the size of the firm's stable income. Most independent sponsors I work with end up at 2.5 percent on invested capital instead of 2 percent on EV to make the year-one math comparable. Take it.

The LPA language matters. "Invested capital" needs to be defined. Does it include the sponsor commit? Does it step up when an LP funds a co-invest? Does it step down when LP capital is returned via a recap? Each of these is a sentence in the LPA.

A two-line change to the LPA. Hundreds of thousands of dollars over the hold period.