Preqin Study Finds Private Debt Management Fees At Eight-Year Low

Mar 9 2017 | 6:13pm ET

New data from Preqin reveals that fees charged by private debt funds during their investment periods, already in a downtrend since 2014, have reached an eight-year low among funds launched last year.

The average management fee has hovered around 1.75% for the past eight years, Preqin said in a statement, with 2013 vintage funds representing a high point with a mean fee of 2.08% and 2016 funds a low point at 1.63%. However, the complexity of portfolio management differs by strategy and fund size; direct lending funds charge the lowest fees as vehicles without an equity component are less costly for the manager, whereas venture debt funds have higher fees due to the intensive resources needed to deploy early stage funding. 

The research was compiled for Preqin’s upcoming 2017 Global Private Debt Report. Other key facts:

  • For 2009-2016 vintage private debt funds, the mean management fee is 1.81% and the median fee stands 
at 1.75%. 

  • Only direct lending and distressed debt funds do not charge above the industry benchmark, with mean
management fees of 1.44% and 1.81% respectively. 

  • Venture debt funds have the highest mean and median management fees in the private debt industry of 2.17% and 2.00% respectively. 

  • The majority of investors (55%) expect to pay fees only on capital deployed by the fund manager, but almost half (43%) think fee structures will vary according to the strategy of the fund. 

  • A third of investors think fees are the biggest concern facing the private debt industry in 2017, though a higher proportion stated valuations and deal flow were key issues. 

  • Just 6% of private debt investors never invest due to proposed terms and conditions, while a fifth frequently opt not to invest and 74% occasionally choose not to invest due to fund terms. 

“Fund terms and conditions within the alternative assets industry have been of particular focus in recent years, as investors have largely united to push managers for greater transparency and improved alignment of interests,” noted Ryan Flanders, Preqin’s head of private debt products, in a statement. “Fees across the private debt industry have largely been decreasing as a result: however, individual strategies must assess the cost of management and the size of the vehicle in order to tailor their fund structures fairly. 

“The majority of private debt investors do believe that their interests are aligned with those of their fund managers, and a quarter believe that terms have changed in their favour over the past few year,” he added. “This general consensus and the diminution of the average industry-wide management fee charged by private debt managers suggests that investors are making ground in moves to equalize the trade-off between fees and fund manager expertise.” 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. More than 40,000 professionals in 90 nations use the company’s products.

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