In an industry that endures constant change, private equity managers are unwavering when it comes to their fee structures.
Over the past seven vintage years, the fees they charge their LPs to cover operational expenses at the portfolio company level have seen minimal change, unlike the reductions that some industry participants expected.
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Despite a challenging fundraising environment and industry-wide expectations that GPs would make concessions to attract capital to subsequent funds, the median management fee PE and VC fund managers charged has hovered between 1.75% and 2% since 2018, according to a recent study from institutional investment consultant Callan.
For LPs, the steady fee structure may come as a surprise given a combination of factors that have shifted some of the negotiating power into their hands in recent years. Minimal distributions from GPs have stifled some investors’ ability to commit capital to subsequent funds, which has extended PE’s fundraising timelines and increased the competition between the many asset managers on the market seeking capital from finite sources.
At the same time, fee compression is rife in other asset classes. Hedge funds’ management fees, for example, fell to a historic low in the beginning of this year at 1.4%, as the asset class faced similar pressures to capital growth and inflow from LPs, according to data from HFR.
And in private credit, largely direct lending, management fees are feeling the squeeze with growing instances of GPs waiving the payments to attract institutional investors into their funds, according to a report from Deloitte.
This dynamic hasn’t translated into concessions on PE’s management fees.
“A lot of people were expecting fees to come down, mirroring what you see on the public markets—and even in private credit—with more fee compression,” said Ashley Kahn, a senior vice president and analyst manager at Callan. “But in private equity, it’s been pretty steady.”
Instead of lowering management fees, PE managers are growing more proactive about offering co-investment opportunities to incentivize LPs to commit capital to their vehicles. Kahn said she has noticed that GPs are increasingly offering co-investment opportunities before an allocator has made a commitment to the fund as a way to set a foundation for a longer-term relationship.
Featured image by Mara Potter/PitchBook News
