WELLESLEY, Mass. -- Private equity firms that raise funds of $1 billion and more have reduced the management fees they charge institutional investors to a range of 1.5% to 2% of capital committed from a previous average of 2% to 3%, according to a new study conducted by Asset Alternatives.
The survey found that up until the early '90s, managers of both venture capital and buyout funds charged annual fees of 2% to 3% of capital committed by limited partners. The fees are used for routine expenses including salaries, rents and office costs.
The study, Private Equity Partnership Terms and Conditions, was conducted in December and January and involved surveying 125 U.S. venture capital, buyout and mezzanine fund managers that raised most of their capital in 1997 and 1998.
The survey also found that the bigger the firm, the more likely its starting management fee was to be lower than that of a smaller firm. Of 66 buyout firms surveyed, those that managed funds of $1 billion and more levied an average starting fee of 1.7%, while all of the buyout firms in the survey charged an average 1.9%. The reason is that larger funds don't necessarily require larger numbers of people and resources, once a certain level is met, the survey found. The same fee differences were found at venture capital funds. Managers of funds of $500 million or larger charged starting average management fees of 1.8%, while the 59 venture funds in the survey charged an average of 2.2%.
The large private equity funds also tended to scale back on management fees in the later years of their partnerships, according to the survey, because fund managers have less work to do once most of the investments have been made.
The study also found the number of billion-dollar buyout funds more than doubled in 1998 compared with 1997.
In 1998, 11 firms held final closings on billion-dollar private equity pools, led by E.M. Warburg, Pincus & Co. LLC, New York, which closed a $5 billion fund and Apollo Advisors LP, New York, which closed a $3.6 billion fund. In 1997, just five firms closed billion-dollar private equity funds.