Private capital money managers have been raising their fee rates in recent vintage years, with increases across private equity buyout, fund-of-funds, real estate, infrastructure and distressed debt strategies, Preqin research finds.
The 2017 Preqin Private Capital Fund Terms Advisor report found closed-end private real estate funds have seen average fees increase to 1.57%, compared with 1.41% for 2015 vintage funds. These are the highest average fees tracked by Preqin in a decade.
A sample of the research showed unlisted infrastructure funds have seen average management fees rise to 1.48% for 2017 vintage funds, up from 1.38% for 2014 vehicles; private equity buyout fund fees have grown to 1.94% for 2017 vintage and raising funds, up from 1.85% for 2015 funds. The research shows 2007 vintage funds and vehicles charged an average 2%.
Buyout funds with more than $500 million in assets are charging higher average fees in 2017 vehicles than previous years, while those with less than $500 million have seen their average management fees fall. However, the average management fee for growth, venture capital and natural resources funds have continued to fall. Figures were not available.
Hurdle rates also have fallen compared to 12 months ago, with the proportion of funds with an 8% hurdle or higher at 18% as of June 30; that compares with 22% a year earlier. The proportion using a hurdle rate of less than 8% remained static at 30% of recent funds.
The research also found the total level of capital being held by private capital money managers as dry powder stood at a record $1.57 trillion as of June 2017, up 11% compared to year-end 2016.
"The private capital industry is enjoying a period of almost unprecedented fundraising, as record distributions and often ambitious allocation plans spur investors to commit ever-increasing amounts of capital," Selina Sy, editor of the research, said in a statement accompanying the report. "This is particularly true of larger fund managers with proven track records: 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. In this context, some of the largest and most successful private capital fund managers have seen the balance of power in negotiating favorable fund terms change in their favor over recent quarters, and some seem to have raised the management fees on their recent or forthcoming funds as a result."
However, Ms. Sy said it should also be noted managers might face increased costs related to deal origination and due diligence, given the "extremely competitive dealmaking environment." As such, she added these managers may deem it necessary to raise fees for managing the funds in order to cover those increased costs.
