Allocators are paying for their managers to travel, sometimes on private jets. According to the contracts they sign with investment firms, this is legitimate — and new data shows that it’s common.
According to private markets research firm Preqin, 63 percent of limited partner agreements allow firms to charge their travel expenses to the fund, with no stipulations that the fees cannot be used for private jets. A further two percent specify that these GPs can use the money for private air travel.
There is a growing trend among investment managers to charge expenses like travel and legal fees to fund investors. These charges are in addition to management and incentive fees — and organizations like the Institutional Limited Partners Association, which represent investors, have argued against the fairness of the practice .
The Securities and Exchange Commission’s landmark private fund rule, passed in 2023, could have required managers to be transparent with allocators about expenses like these. However, that rule was struck down earlier this month — meaning that investment managers can continue to operate as they have been for years.
This means continuing to charge expenses to fund investors in addition to the management fees.
“Compared with ten years ago, the partnership expense sections in the LPA [will] stretch to two or three pages worth,” said Heather Heys, vice president of legal insights at Preqin. “They used to be in a few paragraphs.”
She pointed out that part of the problem for asset owners is the “significant ambiguity” on what they’re paying for. The majority of LPAs, for example, do not define what constitutes a travel expense. Just 16 percent of the agreements assessed by Preqin limit travel expenses up to the cost of commercial airfare.
ILPA’s principles, considered the gold standard among investors negotiating contracts with managers, state that travel related to sourcing deals, networking, and preliminary due diligence should be paid using the management fee. According to Preqin’s data, just 8.2 percent of the funds it looked at were compliant with this principle.
“The LP is not always clear on what they can be charged for,” Heys said.
Heys pulled data on 380 limited partner agreements from Preqin’s new Term Intelligence platform, which can comb through limited partner agreements to find data on fees and other contractual provisions, and then can analyze that based on vintage year, fund size, LP type, and other filters.
Legal fees, too, are being charged back to asset owners. It’s a peculiar structure: Not only are limited partners paying for their own lawyers to negotiate on their behalf — because of these expense charges, they’re also paying for the lawyers who argue against them, on behalf of the general partner.
This is something that ILPA has pushed back against among members, but data shows that it’s still prevalent. According to Preqin’s data, 47.8 percent of LPAs allow for legal expenses to be charged to the fund. Just one fund analyzed Preqin barred GPs against charging investors for this.
Although LPs are paying more for these types of expenses that come directly out of the fund, some have been able to negotiate down the headline management fee with their GPs. According to Preqin’s data, private credit fund investors have thus far been most successful, with 18 percent of contracts evaluated showing fee discounts. The average discount for investors who come in early, before the fund’s first close, is 24 basis points in private debt.
In private equity, four percent of LPAs negotiated discounts for early investments. These discounts are 16 basis points on average.
But Heys cautioned against the belief that LPs are getting a good deal here. “There’s commentary out there that suggests that even though there’s a discount in the management fee, it may be the case that it may just be transferred to the partnership expenses,” she said.
“GPs are resorting to discounts [on management fees] as headline advertisements to attract actual investors,” she added.
