PRIVATE EQUITY MANAGEMENT FEES REMAIN PROBLEMATIC

July 26, 2011 -   The latest Private Equity Spotlight published by Preqin has shown that management fees are still causing significant unrest amongst investors, but almost two-thirds are willing to pay more to access fund managers with strong track records. Other areas of contention include GP contributions, carry, hurdle rates and rebates.  The latest study was conducted for the 2011 Preqin Fund Terms Advisor, which shows the benchmark terms and conditions and also the actual terms employed by individual investment funds.
 
One finding of the study was that 69% of LPs would consider not investing in a fund if it did not conform to the ILPA Principles.
 
"In the difficult fundraising market, negotiating favorable fund terms and conditions are of the upmost importance to investors. That such a large proportion of LPs will not consider investing in a fund that does not conform to the ILPA principles is clear evidence of this," said Helen Kenyon of Preqin.
Another finding was that 61% of investors stated that they would be willing to pay higher fees for access to fund managers that they perceive to have the best track records.
"LPs are not necessarily demanding a specific management fee level; what is far more important is that the fees make sense in the context of the management of the fund. Our recent conversations with LPs have revealed that many will consider paying higher fees if this can be justified by higher performance, and if higher management fees are necessary to operate a superior firm effectively then many investors will see this as a price worth paying," said Ms. Kenyon.
 
Other Findings:
• 50% of LPs feel that there is a misalignment of interests between themselves and fund managers when it comes to management fees.
• 71% of investors are considering new GP relationships in 2011, and just 29% will only invest with existing fund managers.
• The mean management fee during the investment period for the largest funds has dropped to 1.71% in the past year.
• The mean rebate of transaction and other fees by buyout fund managers to LPs is now 83%, the highest level ever.
• A significant number of investors believe that GPs should invest more in their own funds in order to achieve a greater alignment of interests.
 
Preqin is a source of information for the alternative assets industry. The firm provides data and analysis via online databases, publications and bespoke data requests. Preqin has offices in London, UK; New York, NY and Singapore (www.preqin.com).