As record levels of capital flow into private markets, fund managers have started charging more from investors.
Private equity, real estate, infrastructure, and distressed debt funds deployed in 2017 charged higher management fees on average than previous vintage year funds, according to a Preqin report Tuesday. Investors are seeing higher rates as they hand near-record amounts of cash to private-capital managers, which the data provider says raised at least $356 billion in the first half of this year.
“Some of these firms are able to raise record-breaking funds in the space of a few months, and many managers are reporting that their latest vehicles are extremely oversubscribed,” Selina Sy, a Preqin manager, said in a statement accompanying the report. As a result, Sy said some of the “largest and most successful managers have seen the balance of power in negotiating fund terms change in their favor” – and have raised their fees accordingly.
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Buyout funds, for example, have seen average management fees rise over the last two vintage years to 1.94 percent in 2017, from 1.85 percent in 2015, an increase driven by funds larger than $500 million. Infrastructure fees, too, have gone up, from lows of 1.38 percent for 2014 vintages to 1.48 percent for funds deployed this year. And real-estate funds started in 2017 are charging their highest management fees in a decade, according to Preqin.
Sy noted that the rising management fees could be driven in part by an increasingly competitive deal-making environment, with fund managers needing to compensate for the added costs involved in deploying capital. Preqin said earlier this year that a record number of private-equity funds were seeking capital, putting more pressure on an already congested market.
Fundraising in the broader private-capital markets during the first half of this year was 7 percent less than the unprecedented $384 billion gathered by funds in the first half of 2008, just months before Lehman Brothers Holdings failed during the financial crisis, according to the data provider.
As for performance fees, carried interest remained stagnant over the last year, with 82 percent of funds charging a 20 percent fee, according to Preqin. But hurdle rates have fallen, meaning managers need to earn lower returns in order to take home performance fees. Only 18 percent of funds used a hurdle rate higher than 8 percent in June, compared to 22 percent a year earlier.