Private equity management fees drop for the second year in a row – Preqin

GPs are finding it harder to raise funds and now must be more tactical during their fundraising process, offering incentives to entice investors including first-close discounts, carry-free co-investment opportunities, and management fee cuts.

As a result, mean management fees in private equity, private debt, and real estate are now close to the low end of their 20-year ranges, according to Preqin’s Private Capital Fund Terms Advisor report.

‘Fundraising headwinds can be traced to interest-rate hikes and the current higher-for-longer environment. The higher rates are linked to lowered valuations and a slower exit environment, which has put pressure on distributions,’ said Brigid O’Connor, AVP, Fees and Terms Lead, Research Insights, and lead author of the report, said. ‘The distribution drought means that investors have less capital to commit to new funds while fund managers find themselves making concessions in fees and terms to meet fundraising targets.’

• Private equity funds that are raising and have a 2024 vintage had mean management fee rates of 1.74% for buyouts and 1.93% for growth equity strategies, compared to 1.85% and 1.97% for 2023 vintage funds. This is a second year of decline and, given that fundraising pressures are projected through to 2026, management fees could drop further.

• Interest rate cuts across major economies have slowed the growth of private debt, with $125.7bn raised so far in 2024, significantly down on the peak $243.9bn raised in 2021. Private debt funds raising and closed in 2023 and 2024 have the second lowest average fee rate in private markets, ahead of real estate. However, over the past 10 years, the mean investment period management fee for direct lending funds has stayed close to 1.5%, while for non-direct lending funds the mean rate has fluctuated around 1.7%.

• Real estate managers have historically charged the lowest mean management fees; however, the fees have since declined to a twenty-year low of 1.31%. Preqin analysts note that other dynamics play a role in headline fee rates, such as fund size.

• Venture capital funds continue to be able to charge the highest fees among all asset classes, with the median and mean investment period management fee hovering around 2.0% since 2012. For 2024 funds, there has been a slight uptick to a median of 2.05% and a mean of 2.24%.

• Infrastructure mean management fee rates crested above 2.0% in 2023 but have declined based on their relationship to fundraising. Mean management fee rates in infrastructure are more volatile than in other asset classes, with fee rates more sensitive to fundraising dynamics.

The Private Capital Fund Terms Advisor 2024 report draws on Preqin Pro and Freedom of Information Act data. It also includes data from Preqin’s Term Intelligence, one of the largest searchable databases of Limited Partner Agreement terms globally, and enables enhanced private fund negotiations, providing an unparalleled view into management fees, carried interest provisions, expense allocations, and more.

Tune in to Preqin’s webinar, Fund Terms Advisor 2024: Recent Developments in Fees and Terms, on October 24, where Brigid Connor and Heather Heys, VP, Legal Insights, will discuss why management fees in some asset classes have seen adjustments in response to a tough fundraising environment while carry structures have not.

_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}