1. Investing in the best funds is competitive for LPs. Top funds often have more demand for investment than the fund will accept, so the partners have greater leverage to dictate terms. It's like an entrepreneur having multiple term sheets.
2. The big bucks come from fund returns, not management fees. In this sense, LPs and partners are highly aligned, since 80% of those returns go to LPs (assuming a 20% carried interest fee - obviously this varies by fund).
Wait, didn't Kauffman suggest that many funds were getting most of their returns from fees? That the fee structure was encouraging the creation of huge funds so that partners could profit from those fees, despite the fact that larger funds are harder to invest well? That most funds are underperforming the market?
Kauffman's portfolio included Bessemer, Benchmark, and General Atlantic, among others. They weren't talking about shady funds.
If you really are expecting to get a giant locked-in chunk of your return from fees, than the interests of partners and the "chief partner" are not necessarily aligned.
No, Kauffman simply said returns were lower for big funds and generally higher for small funds. But it doesn't really matter - most funds actually pay management fees back to LPs before they're allowed to generate carried interest.
For example, if a fund earns $10M in management fees, it would pay back that $10M from the first returns generated by the fund. Then, only after getting "breaking even," would the partners earn carried interest. If the fund doesn't hit that watermark, it loses money for investors.
There are exceptions, though most of the industry has moved this way.
Personally, I don't put much weight into it. It's conclusions are heavily skewed by the decade after 2000, which destroyed returns for most investing asset classes. (Despite the report's claims that it covers "20 years" of funds, most charts and examples, esp about mega funds, are recent).
Little known fact: most funds pay back management fees with initial investment returns. Partners earn carry after the fund breaks-even. You can't jump into VC and make millions without delivering returns.
Many people were able to raise $100-400M funds during the 2003-2007 time period, and thus their management fees were $2-8m per year. That can make several people millionaires over the course of the fund life. Most of these funds did not have good returns.
