Management fees for private equity buyout funds have fallen to their lowest level since tracking began in 2005, as fund managers face increasing pressure to attract investors in a challenging fundraising landscape, according to a report by the Financial Times.
According to data from industry expert Preqin, the average management fee for buyout funds that closed or were still raising capital as of June 2024 dropped to 1.74% of investors’ committed capital, down from the previous low of 1.85% in 2023.
Over the past two years, private equity firms have struggled with exits, as traditional avenues like initial public offerings (IPOs) and corporate acquisitions have been limited by higher interest rates, valuation disputes, and economic uncertainty. As a result, firms have returned less capital to investors, leaving those investors with less liquidity to reinvest in new funds.
The report quotes Greg Durst, Senior Managing Director at the Institutional Limited Partners Association, which represents private equity investors, as saying that: “The pressure on fundraising is driving buyout managers to make concessions on fees and terms.” Durst also noted that many investors have been slow and cautious about committing new capital.
Another factor influencing lower fees is the growth in fund size. As larger fund managers secure higher fee volumes, some have opted to reduce their rates, while smaller firms are cutting fees to remain competitive.
Larger firms, which often manage funds across multiple strategies like private credit and buyouts, are offering discounted rates for investors committing to several strategies, Durst explained. For example, while a single strategy might come with a 2% management fee, committing to three strategies could bring the rate down to 1.75%.
While management fees have declined, performance fees — or carried interest, the share of profits fund managers keep — have remained stable, averaging around 19.5% of fund profits over the last 20 years after a minimum return threshold for investors is met.
Interestingly, Preqin’s data revealed no significant downward pressure on management fees for private debt funds.
The data reflects management fees during the capital deployment phase of a fund, typically the first three to five years of its lifecycle.
