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Management fees on private equity buyout funds have fallen to their lowest levels since records began in 2005 as fund managers fight to attract investors in a tough fundraising environment.
According to industry specialist Preqin, the average management fee for buyout funds that closed this year or were still raising money in June was 1.74 per cent of investors’ committed capital. The previous low was 1.85 per cent in 2023.
In the past two years, private equity firms have struggled to sell out of their investments. The usual exit routes of stock market IPOs and industry dealmaking have been limited by higher interest rates, disagreements about valuations and general economic uncertainty.
Firms have returned less money to their investors as a result, in turn leaving those investors with less cash to reinvest in new buyout funds.
“Because of that pressure on fundraising, that’s why [buyout managers] are going to make concessions on fees and terms,” said Greg Durst, a senior managing director at the Institutional Limited Partners Association, which represents the industry’s investors.
“They’re being very slow and judicious about how they’re going to be making new commitments.”
He added that over the past couple of years, the cash returned by private equity managers to their investors, known as limited partners, has been “way, way off what LPs had grown accustomed to planning around” and that had been “a challenge”.
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In addition to the difficult fundraising environment, another factor affecting fees is the size of the fund manager.
According to Preqin, as fund sizes have increased over the past 20 years some of the bigger managers, who receive a larger volume of fees, have chosen to cut their rates. Some smaller firms have cut their fees to try to compete.
“Many investors have concentrated on relationships with the largest fund managers,” said one London lawyer who advises mid-market private capital funds. “This means that smaller managers at the lower end of the market are having to work harder.”
A lot of the larger firms manage funds across multiple strategies, such as private credit and buyout, and “will offer a fee break across all of them”, said Durst. “If you’re in one, you’re in for a 2 per cent management fee. If you do three, you’re in for 1.75 [per cent].”
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Bigger limited partners also have more leeway to negotiate on fees, according to one London family office manager.
The family office manager, who allocates relatively small amounts of client money to “some of the biggest and most prestigious [private equity firms] on the planet”, said they were not paying less.
“I suspect it’s only one category [of investor] paying lower fees and that it’s the big boys who write $25mn to $100mn cheques.”
Despite the falls in management fees, buyout fund performance fees — or the share of profits that fund managers get to keep on their successful investments, also known as carried interest — have barely changed, Preqin found.
Over the past 20 years, that figure has hovered around an average of 19.5 per cent of fund profits, after a minimum return for limited partners is met.
The Preqin data also shows that there has been no notable downward pressure in management fees for private debt funds.
Private debt management and performance fees can be lower than for other private asset classes depending on the risk and potential returns, the data provider said.
There has been an upsurge in investor interest in private debt investment.
The Preqin data refers to the management fees for the period in which fund managers are actively investing the capital, usually the first 3 to 5 years of a fund.
