The private capital asset class with the lowest average management fees

Private debt managers are expecting increasing investor demand in the years ahead. The third-largest private capital asset class after private equity and venture capital by assets under management (AUM), private debt is forecast to expand its AUM to $2.64tn by 2029, up from $1.50tn at the end of 2023, according to Preqin’s Future of Alternatives 2029 report. Part of private debt’s growth story is that its performance is projected to improve. Preqin forecasts private debt’s 2017–2023 average IRR of 8.1% to increase to 12.0% between 2023 and 2029.

Private debt fund managers are also pricing their management fees to entice even more investors. Preqin Term Intelligence data shows that the average management fee for private debt inside the investment period is 1.40%, which is lower than private equity (1.81%), venture capital (2.15%), and real estate (1.46%) (Fig. 1).

Fig. 1: Average management fee for private debt inside and outside the investment period is lower than other private capital asset classes
Management fee rate and mode by asset class

_{Source: Preqin, Term Intelligence}

Outside the investment period, the average management fee for private debt is still lower versus other private capital asset classes at 1.33% compared with private equity (1.66%), VC (1.95%), real estate (1.43%), and infrastructure (also 1.43%).

Another notable difference between private debt and other private capital asset classes is the way management fees are calculated. Inside the investment period, private debt funds mainly use actively invested capital as the basis for calculating management fees, rather than initial commitment (Fig. 2). Private debt funds tend to deploy capital at a faster rate, and actively invested capital decreases as the investments are realized.

Fig. 2: Private debt funds mainly use actively invested capital as the basis for calculating management fees, rather than initial commitment
Management fee basis by asset class, inside investment period

_{Source: Preqin, Term Intelligence}

Among private debt funds tracked by Preqin, 57.5% base their management fees on actively invested capital inside the investment period, with 23.3% based on initial commitment. Among most other asset classes, using initial commitment as the basis for calculating management fees during the investment period is more prevalent – in private equity for example, 95.9% of fees are based on initial commitment.

Outside the investment period, private debt management fees more closely mirror most other asset class fee structures, where management fees are based on actively invested capital (Fig. 3). The exception is VC.

Fig. 3: Private debt management fees more closely mirror most other asset class fee structures outside the investment period
Management fee basis by asset class, outside investment period

_{Source: Preqin, Term Intelligence}

Why data on how fees and terms differ across asset classes is vital

As investors and fund managers expand into asset classes such as private debt, determining the market standard for fund fees and terms is crucial for both parties.

In today’s tough fundraising environment, GPs are looking for a competitive edge. Access to data on fees and terms can help GPs determine what concessions to make, and by how much. Meanwhile, investors need to understand the market standard for the fees and terms laid out in limited partnership agreements (LPAs). This understanding helps LPs ensure that they are offered fair terms and empowers their negotiations.

Knowledge of how fund fees and terms differ across asset classes is also critical for legal teams facilitating negotiations between investors and fund managers. Existing databases of terms commonly included in LPAs may not cover all asset classes, and may not be representative of the entire market. As investor demand for greater transparency continues to grow in the private capital industry, calls for more and better data on fees and terms are likely to increase.

Term Intelligence is a fund terms benchmarking solution that enables you to compare LPA terms against the wider market. With Term Intelligence, you can negotiate LPA terms more effectively, draft competitive fund terms backed by market data, understand which ILPA principles the market is adopting, and expand into new asset classes. Learn more about Term Intelligence.

➔ About Primers.

Preqin Primers are a series of short reports on the major trends shaping the alternative investment industry.

They combine key stats from Preqin Pro with the views of fund managers, investors, and service providers.

If you'd like to connect with our research team to share data or learn more about our methodology, please get in contact here.

_{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 accepts no liability for any decisions taken in relation to the above.}