The management fee charged by private equity real estate funds during their investment period is generally calculated as a percentage of the total commitments made by LPs to the fund. The rationale behind this is that the major part of the GP’s workload at this stage is the search for potential investments, which is driven by the aggregate size of commitments to the fund and not the amount invested at this point in the fund’s life.
Preqin has analysed management fees charged during the investment period by real estate funds with a 2009 or 2010 vintage, or those still raising capital as of Q2 2010. Nearly half of all such funds have a management fee of 1.50-1.74%, and nearly a quarter have a fee of 2.00-2.24%. Just over one-tenth of funds have a 1.75-1.99% management fee, and 12% use a rate of 1.00-1.24%.
While the largest proportion of private equity real estate funds charge a management fee of between 1.50-1.74%, which is generally considered to be the industry standard, there has been some movement in the fees charged by the largest funds. The largest real estate funds of the most recent vintages have had significantly lower average management fees than vintage 2007 and 2008 funds. The mean management fee for vintage 2010 funds (including those still fundraising and yet to begin investing as of Q2 2010) of $1 billion or more in size is 1.25%. For funds of this size, the mean management fee is 1.56% for funds of 2008 vintages and 1.75% of funds of 2007 vintages.
Managers of the larger funds are most likely to be in a position to reduce management fees, or to have come under pressure to do so from investors because of the economies of scale involved. A firm that raises a $1 billion fund is unlikely to have twice the costs in terms of wages and other expenses that a firm managing a $500 million fund does. It is clear that for these funds, there has been a shift in the balance of negotiating power towards LPs. For funds under $1 billion however, there has been very little movement in management fees. Funds which raised under $500 million have a mean management fee of just over 1.6% for 2008, 2009 and 2010 vintage years, while funds which fall into the $500-$999 million bracket, have management fees just under the 1.6% mark.
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