“The whole ‘two-and-20’ structure was conceived when it was necessary to keep the lights on. The industry has scaled a thousand-fold since,” says one service provider. “Lightbulbs are more expensive than they were, but it’s not that much worse.” It’s fair for LPs, he thinks, to wonder why they’re paying even 150 to 200 basis points on what can be billion-dollar-plus funds.
As we write in this month’s cover story, the pandemic has resulted in a temporary fee desert: transaction fees have evaporated, and advisory fees not already offset against management fees may be deferred. For some, management fees are indeed a matter of keeping the lights on, right now.
But secular downward pressures on fees and upward pressures on costs are also at play, industry-wide. And there are those who think the time is ripe for a fee revolution.
For large and established managers, fundraising activities aren’t showing any susceptibility to such downward pressures. Take Brookfield, which just reported the best fundraising quarter it’s ever had. A reputable lower mid-market manager I spoke to is even taking the opportunity to add an administrative fee on top of the management fee for the fund it is now raising, arguing the firm has been “too investor-friendly” in the past.
If the Institutional Limited Partners Association’s thinking is indicative, emerging managers are most vulnerable on the fee front. ILPA found that now was the right time to release a deal-by-deal structure model LPA that aims to make such structures more investor-friendly. Its declared hope that emerging managers – now in tougher competition than ever with their peers – will take it up.
Many emerging managers, tending to rely more heavily on advisory and transaction fees for their steady income, are likely to already be feeling the pinch.