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Preqin reveals disparity in fees charged by private equity fund managers

Figures compiled for the forthcoming 2015 Preqin Private Equity Fund Terms Advisor show a significant disparity in the fees private equity fund managers offer investors in their separate accounts and co-investment opportunities, compared with fees for commingled fund investments.

When calculating performance fees, 48 per cent of fund managers charge a 20 per cent carry rate for separate accounts, compared to 85 per cent of managers running commingled funds. 48 per cent of managers charge no carried interest on co-investments, while only a quarter keep the same rate as in their main vehicle.
 
With regards to management fees, private equity separate accounts have a median average fee of 1.00 per cent, and a mean average of 1.15 per cent. In addition, 42 per cent of fund managers will reduce or remove these fees after the initial investment phase. By comparison, almost three-quarters (73 per cent) of commingled buyout funds currently in market or with a 2014/2015 vintage charge the “industry standard” management fee of 2.00 per cent or more during the investment period. Forty-nine percent of managers charge no management fees on co-investments, with only 16 per cent maintaining their standard rate.
 
The average rate of management fees on separate accounts varies significantly according to fund type. Mean and median management rates for a buyout separate account are 1.69 per cent and 1.88 per cent respectively, just below the standard 2.00 per cent. However, the median fund of funds separate account rate is 1.00 per cent, and private equity real estate funds charged a median 0.78 per cent management fee. 

The proportion of investors that cite management fees as an area in need of improvement has dropped from 59 per cent in June 2013, to 40 per cent in June 2015, while fees charged on unspent capital have fallen off the top list of investor concerns. 

Investor concern with performance fees has risen, both over the amount paid, and the structure of charges. Data shows that the amount of performance fees, and the fee structures, concern 32 per cent and 21 per cent of investors respectively, up from 28 per cent of investors that were concerned with carry structure in 2014. 

Twenty-nine percent of private equity fund managers contribute 0-1.99 per cent of the value of their separate accounts, broadly in line with the typical 1 per cent rate of GP commitment. Almost half (47 per cent) commit 5 per cent or more, while 15 per cent of fund managers contribute over half the total value of their separate accounts.
 
“Preqin’s latest analysis of private equity fund terms and conditions shows some progress in aspects that investors have previously marked as areas of concern,” says Selina Sy, senior manager at Preqin/ “Far fewer investors are concerned about the level of management fees at present, and at the same time, the proportion of investors that believe their interests are aligned with those of managers has risen significantly.

“Separate accounts and co-investment opportunities offer sophisticated investors a number of benefits in accessing private equity beyond traditional commingled fund investments, and in addition, the fees associated with these investments are significantly lower. The growing appetite for alternative routes to private equity has the potential to threaten the traditional, commingled fund structure, and GPs that adapt to the evolving fundraising environment will better meet the needs of LPs and create long-term, mutually beneficial LP-GP relationships.”

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