Market favours LPs in fee negotiations, report shows

Recent market changes have favoured LPs, as tighter global monetary policy has led to greater GP competition for a smaller pool of capital, strengthening LPs in negotiations, data showed.

The Prequin annual Private Capital Fund Terms Advisor report showed that for the category of funds raising and 2022/23 vintages, the mean management fee is below 2% in every private asset class. From a private equity strategy perspective, growth capital reached mean fees of 2.05%, while the real estate mean management fee for the same category is 1.54%.

Management fees remained stable for the most recent vintage of 2023 versus 2022, while buyout fees from 2005 to 2023 have averaged 1.91%, compared to 1.90% for 2023/raising vintages.

Originally, management fees aimed to cover operating expenses, while carried interest allowed GPs to profit from investment performance. However, according to the report, “this dynamic is shifting as large fund managers now generate sufficient income from management fees alone to cover their costs”.

Venture capital management fees decreased slightly from 2.02% in 2022 to 1.97% in 2023, the lowest since 2017. Direct lending’s average management fees stood at 1.73%.

In the private debt category, the average management fee for direct lending decreased to 1.40% in 2022 but has risen to 1.73% in 2023.

Growth equity funds typically charged fees ranging from 2% to 2.24%, with 72% of funds falling within this range, marking a 5-percentage-point increase from 2022. 

Data indicated that average management fees for infrastructure funds have increased to 2.00% to 2.25% in 2023.

© 2023 funds europe

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