Bolstered by record fundraising amid soaring investor demand, private equity fund managers raised fees in 2017, according to research by Preqin.
Private equity buyout, funds of funds, real estate, infrastructure and distressed debt funds all saw rising mean management fees in more recent vintage years.
Unlisted infrastructure funds saw mean management fees rise from 1.38% for 2014 vintage funds to 1.48% for 2017 vintage funds and vehicles in market. Private equity buyout funds saw mean fees rise from 1.85% for 2015 vintage funds to 1.94% for 2017 vintage and funds currently being raised. Across the same period, closed-end private real estate funds have seen average fees go from 1.41% to 1.57%, and 2017 vintage real estate funds are charging the highest average fees tracked by Preqin in a decade.
“The private capital industry is enjoying a period of almost unprecedented fundraising, as record distributions and often ambitious allocation plans spur investors to commit ever-increasing amounts of capital to private capital funds,” Selina Sy, editor of the Preqin report said in a statement. “This is particularly true of larger fund managers with proven track records: some of these firms are able to raise record-breaking funds in the space of a few months, and many managers are reporting that their latest vehicles are extremely oversubscribed.”
The booming demand is allowing managers to charge higher fees. “In this context, some of the largest and most successful private capital fund managers have seen the balance of power in negotiating favourable fund terms change in their favour over recent quarters, and some seem to have raised the management fees on their recent or forthcoming funds as a result,” Sy said.
Along with negotiating leverage, the increased costs of executing transactions in a highly competitive environment—items such as deal origination and due diligence—could also be a justification for managers to raise fees, Sy said.
While carried interest rates remained level over the last year, hurdle rates have come down over that period. The proportion of funds with a hurdle higher than 8% fell from 22% of recent funds as of June 2016, to 18% a year later. The proportion using a hurdle lower than 8% remained static at 30% of recent funds.
The booming fundraising and fee rises come even as dry power—the amount of uninvested capital available to fund managers—climbed to record levels. Dry powder climbed to $1.57 trillion in June 2017, an increase of $156 billion from the end of 2016, Preqin reported.
Other asset classes trying to regain investor interest, such as hedge funds, have seen fees decline during the year.
Tags: fund of funds, Infrastructure, PE, Private Equity, Real Estate