Venture capital management fees slipped to 1.97% in 2023 from 2.02% in 2022, marking their lowest such level since 2017, according to the annual Private Capital Fund Terms Advisor report released by Preqin on Oct. 18.
In 2022, one-fifth of VC funds charged a management fee above 2.5% — in 2023 that percentage declined to 16.29%.
"Current market conditions in recent quarters have likely led fund managers to cut fees to attract limited capital," Preqin said in a release issued along with the report.
Preqin also noted that as management fees are one of the biggest costs for limited partners when investing in private capital, such fees can often determine the relationship between general partners and an LP.
"Market conditions over the past two years have evolved in LPs' favor," Preqin said. "Tighter monetary policy globally means that GPs are now competing for a more limited pool of capital, which strengthens LPs' position in negotiations."
The original goal of management fees was to cover operational expenses, while carried interest allowed GPs to profit from their investments' performance, Preqin noted in the report. However, this relationship has been shifting, as large fund managers earn more than enough income from management fees alone to cover overhead costs.
"Overall, the picture for fees in private capital is one of relative stability," said R.J. Joshua, vice president, head of private debt and fees-research insights, at Preqin, in the release. "Private capital faces many challenges in the quarters and years ahead, and we may see increased scrutiny of fees as these barriers to performance increase."