What Does Monitoring Fee Mean?
A monitoring fee is a fee charged by a private equity organization to an investor for the advisory service provided to them. It can either be a fixed amount every year or calculated as a percentage of revenue or profit. In the case of percentages, there is usually a minimum amount that a client has to pay regardless of profit or revenue. Many private equity firms enter into an agreement with their clients to collect the monitoring fee every year for a certain number of years such as 10 or 20. This fee is charged to both individual and institutional clients of the private equity firm.
Divestopedia Explains Monitoring Fee
A monitoring fee is a recurring fee that can be charged by a private equity firm to augment its income. It can be charged to an investor for monitoring and handling his/her investment, while for a corporate organization, it is charged when there is an investment firm involved in a takeover or other deal-based activities. There is no fixed cap on how much an equity firm can charge its clients, but it varies anywhere from one to three percent.
This monitoring fee is charged based on the Management Services Agreement (MSA) entered into by the firm and its clients. This agreement is for 10 or 20 years depending on the terms agreed to by both parties. Most MSAs also come with a provision called accelerated payment, under which clients must pay the monitoring fees for the entire period agreed, even if the private equity firm is sold or if the holdings of the client are sold before the end of the term.
Finally, monitoring fees can average between three to five percent of EBITDA.