Private debt is getting cheaper.
The rapidly growing asset class – now reaching $600 billion in assets under management – has not been immune to the downward fee pressures faced by alternative managers, according to a Preqin report released Thursday. Management fees for 2016 vintage funds were 1.63 percent, tumbling from as high as 2.08 percent in 2013 and an average 1.75 percent for the past eight years.
“Fund terms and conditions within the alternative assets industry have been of particular focus in recent years, as investors have largely united to push managers for greater transparency and improved alignment of interests,” said Ryan Flanders, head of private debt products at Preqin. “Fees across the private debt industry have largely been decreasing as a result.”
Private debt assets have quadrupled over the last decade, increasing to $595 billion in June 2016 from $147 billion in December 2006. The three largest private debt funds now being raised are managed by Apollo Global Management, Centerbridge Capital Partners, and Cerberus Capital Management, according to Preqin, which predicts industry growth is likely to continue, as 62 percent of investors it surveyed said they planned to increase their allocations to the asset class over the long term.
Distressed debt has proven the most popular, with the eighteen funds that closed in 2016 raising a combined $32 billion – an average of $1.8 billion per fund, more than twice the size of the average mezzanine debt fund. Currently, Apollo European Principal Finance Fund III, Centerbridge Special Credit Partners III-Flex and Cerberus Institutional Partners VI are each seeking to raise $3.5 billion for distressed opportunities, Preqin said.
Direct lending funds have the lowest management fees in the private debt sector in recent years, charging a mean 1.44 percent from 2009 to 2016, according to Preqin. Distressed debt managers charged 1.81 percent, the mean management fee for all types of private debt funds raised in that period, while venture debt funds were the most expensive at 2.17 percent.
In terms of performance, current private debt investors are almost universally pleased with the asset class, with 95 percent reporting their private debt portfolios have met or exceeded return expectations over the last year.
“The majority of private debt investors do believe that their interests are aligned with those of their fund managers, and a quarter believe that terms have changed in their favor over the past few years,” Flanders said. “Investors are making ground in moves to equalize the trade-off between fees and fund manager expertise.”
