As highlighted in the 2013 Preqin Investor Network Global Alternatives Report, one of the key considerations for investors in private real estate funds is the level of management and performance fees they charge. Many investors, and their consultants, attach high priority to understanding the varying nature of the fees charged by private real estate funds. It is important to get access to right the funds, but also to ensure you are being offered appropriate fee structures.
When breaking down management fees during the investment period by closed-end private real estate funds currently raising capital and closed funds of vintages 2011-2013, it can be seen that 40% of private real estate funds charge a 1.5-1.74% management fee. This range is fairly typical of real estate funds and an indication that, while many investors feel manager terms are not quite aligned with their interest, management fees have not shifted dramatically in their favour. Management fees of 1.75% and above are not uncommon either, and 24% of funds charge management fees of over 2%. There are funds that offer lower management fees, with about 28% of vehicles with management fees of 1.5% or below.
With the post-investment period resulting in fewer costs for fund managers, management fees charged to investors are often lowered. Nonetheless, 15% of funds do not alter the management fee structure. The majority of funds offer a reduction in fees by way of charging the same management fee but only on invested capital, with 55% of funds offering this method of fee reduction. A further 9% of funds provide a reduced rate charged on invested capital. Investors should factor in appropriate fee structure both upon commitment and after the investment period.
Hurdle rates are similar to the levels seen in private equity and infrastructure, with 88% of funds maintaining a hurdle rate of 8-10%. It is worth noting that 86% of real estate funds charge a carried interest rate of 20%, similar to private equity and infrastructure. Investors should seek funds that are not only competitive on management fees, but also on performance fees.