In part one of this series, we explored some of the challenges that investors face when looking to allocate to alternative assets, and how Preqin can help cut through an industry that now comprises more than 20,000 potential investment opportunities. Here, in part two, we look at how proposed fund terms can be difficult for investors to compare, and how we help to provide a consistent basis for evaluating funds.
Complex Fund Fees
It is now widely recognized that the “2 & 20” model for fees is no longer the industry standard. Hedge funds have seen the average management fee fall to 1.54% in 2018, and average performance fees now stand at 19.22%. The picture is more mixed among private capital funds: while the average management fee for real estate and real assets funds is closer to 1.50% than 2.00%, the average private equity fund still charges 1.97%.
But what has changed is the increasing prevalence of non-traditional structures, such as the 1/25 or even 0/30 models that collect higher performance fees in lieu of guaranteed management fee income. More broadly, many private capital funds now charge management fees only on invested rather than committed capital – a particular concern for investors at a time when private capital dry powder is approaching $2tn. Managers may also adjust hurdle and clawback rates in order to show investors that they will not pay for anything other than above-average performance.
How to Choose?
These changes are generally to benefit investors, and the majority of investors have reported to Preqin that they think fund terms have swung in their favour over the course of 2017. But with so many fund models being marketed – and with inconsistent approaches across different fund strategies, regions and sizes – it is very challenging to tell if one fee structure is more likely to benefit you than another.
With our fund fees and terms data, though, you can benchmark the fees and terms you might expect from a fund. You can benchmark average fee rates depending on fund type, location, size, and so on, and see how a prospective fund compares. We produce an annual report on trends in this area: the Private Capital Fund Terms Advisor, which includes line-by-line information on the precise fees and terms used by thousands of private capital funds.
We also track hedge fund fees, allowing investors to compare proposed fees against a top-level region or strategy, or against a specific selection of funds. It includes automatic calculators to show industry averages and what proportion of funds use different fee rates.
More than Money
Beyond the fees charged, the we track the terms used by private capital funds, such as no-fault divorce clauses, key-man clauses and fund extension agreements. We are developing further tools to show whether typical funds of a certain type use credit lines, so you can more effectively mark a prospective fund against its peers.
For hedge funds, our data tracks the lock-up and redemption periods for almost 10,000 single-manager, multi-manager and UCITS funds, and allows you to break those figures down by region, type, strategy and size. You can also search for specific funds and compare funds and terms within a specific peer group.
Ultimately, every investor has different priorities and so different fund terms and fees will best suit them, but Preqin facilitates the process and allows you to easily mark a fund against its peer group when evaluating what the proposed terms will cost you. Get in touch with us to find out more about how our fund terms data can help you.
In the next and final instalment on this topic, we look at how Preqin’s investor data allows you to compare your own allocation program to other investors’ and see what your peers are investing in.