From 1 Layer of Fees to 2 Layers: When Can a Venture Fund-of-Funds Still Improve Net Returns?
Carta's 2025 Fund Economics Report gives a useful starting point for venture fund fee and carry terms. Venture funds commonly charge a management fee and carried interest before any fund-of-funds layer is added. A fund-of-funds must improve the portfolio enough to overcome both the underlying fund economics and its own layer.
Carta reported a median 2% management fee and 20% carry across venture funds in its sample.
A Second Fee Layer Can Still Improve the Net Result
A second fee and carry layer can still improve net returns if the fund of funds earns its place. It may provide better managers, a stronger portfolio, useful co-investments, or work the LP cannot do well internally. The extra layer is a hurdle, not an automatic reason to reject the structure. The comparison should start with net cash flows from the full route.
| Route | Cost layers | Potential value |
|---|---|---|
| Direct funds | Underlying fees, carry, expenses, and internal LP cost | Direct manager choice and relationship |
| Fund of funds | Underlying costs plus fund-of-funds fees, carry, and expenses | Manager access, diversification, pacing, data, and administration |
If the fund-of-funds reaches managers that produce stronger gross returns or avoids weak funds the LP might have selected, the difference can exceed the added costs. The value should be shown through performance attribution and access history. A long manager list is not enough. The LP should know which relationships were otherwise unavailable and how they affected results.
Co-Investments Can Change the Economics
Some fund-of-funds programmes provide co-investments with lower fees or carry. These positions can reduce the blended cost and add company-level choice. They can also add concentration. The fee benefit should not become a reason to over-size one company.
- Underlying fund return: Gross and net at the first layer.
- Fund-of-funds costs: Fees, carry, and expenses over time.
- Internal direct cost: Staff, legal, data, and access.
- Co-investment effect: Economics and concentration.
- Cash timing: Calls and distributions at both levels.
The second layer is worthwhile when the finished programme delivers better net results or a better-managed risk than the LP could build directly.
On a $100 million fund-of-funds commitment, an additional 1% annual management fee costs $1 million per year before considering any fund-of-funds carry. This sits on top of underlying fund economics in a market where Carta reported median venture terms of 2% fees and 20% carry.
The extra fee compounds over several years. If that 1% fee runs for 5 years, the extra management fee is $5 million. The fund-of-funds must create at least that much incremental net value before the structure improves the LP outcome.
The Hurdle Is Lower When Access Is Better
Better access must create enough value to cover the extra fee layer. If a fund-of-funds improves a $100 million portfolio's net value from $200 million to $215 million after all extra costs, the LP receives a 2.15x net result instead of 2.0x. If it only improves gross access without improving net value, the second layer has not paid for itself.
An extra one percent annual fee on a $100 million fund-of-funds commitment equals $1 million per year and $5 million over five years.
Second-Layer Fee Hurdle
The fund-of-funds must create enough incremental net value to overcome the extra fee layer.
View fee-layer assumptions
| Item | Amount | Assumption |
|---|---|---|
| Fund-of-funds commitment | $100M | Illustrative LP commitment. |
| Extra annual fee | 1.0% | Second-layer management fee example. |
| Annual cost | $1M | $100M x 1.0%. |
| Five-year cost | $5M | Before fund-of-funds carry or offsets. |
The direct alternative is not free. An LP investing in ten venture funds must find the managers, review the legal terms, process calls, monitor valuations, decide on re-ups, and maintain enough staff to understand the combined portfolio. A fund of funds puts a visible price on some of that work. The fair comparison is therefore between two complete net outcomes. On the direct side, include internal staff, consultants, legal work, data, travel, and the cost of weak access or missed re-ups. On the fund-of-funds side, include both fee layers, carry, underlying expenses, and any benefit from co-investments or secondary purchases.
The extra layer earns its place only when the resulting portfolio is better after all costs. That improvement may come from manager selection, earlier access, better commitment timing, or work the LP could not perform at the same quality on its own.
Frequently Asked Questions
Are two layers of fees always bad?
No: They are a hurdle. The structure can still work when access, selection, sizing, and diversification create more net value than the extra layer costs.
Should large LPs avoid fund-of-funds?
Not automatically: A large LP may still use specialist allocations, emerging-manager portfolios, or geographic access where a fund-of-funds has an advantage.
Related Reading
fund-of-funds fee hurdle, gross-to-net leakage, and MOIC vs IRR.