A smaller percentage of private equity managers in 2016 — 60% down from 64% last year — are setting performance targets the managers must meet before sharing in their funds’ profits, but a larger percentage of general partners that have set hurdle rates are setting them higher than last year, said a Preqin survey released Thursday.
Some 22% of private equity firms with 2015-2016 vintage funds set hurdle rates higher than 8% grew by 14 percentage points from last year’s report. Meanwhile, private equity managers with 8% hurdle rates fell by 8 percentage points to 48% and the proportion of general partners with no hurdle fell 6 percentage points to 13%
Meanwhile, about 33% of private equity investors indicated that fund terms have changed in their favor over the past 12 months ended May 31. Among those investors that indicated they do not believe their interests are aligned, the biggest area for improvement cited by 64% of investors surveyed was management fees, followed by transparency (47%) and performance fees (42%). Respondents could select more than one choice.
At the same time, the majority of private equity managers with 2015-2016 vintage funds or funds in the market have not lowered carried interest below the standard 20%, the survey shows. Some 84% of 2015-2016 funds and funds currently being raised charge a 20% carry fee, 11% charge a lower rate and 5% charge a higher rate.
Some 53% of investors indicated that they have occasionally declined to invest in a fund due to the fund’s terms, while 14% stated that they frequently do so and 33% reported that fund terms have never affected their decision to invest in a fund.
Larger funds charge slightly lower management fees with the mean management fee for buyout funds of $1 billion or more now 1.53%, compared to 1.78% mean management fee for all 2015-2016 vintage private equity funds or funds currently being marketed.
Information on the survey methodology could not be learned by press time.