Fund of funds fees under increasing pressure

A new private equity real estate study declared a ‘real focus’ on reducing the fee burden for funds of funds, with management fees being the clear target.

Investors in non-listed real estate funds of funds will seek to apply further downward pressure on fees to minimise overall management costs in the future.

That was the conclusion of the INREV Fund of Funds Fees Study 2011, released this week.

The industry association said respondents to the study reflected a common view that there was more pressure from investors to reduce management fees than to attack performance fees, but both are under scrutiny. 

Nonetheless, fees for funds of funds remain simpler and less burdensome than those associated with underlying funds, it added.

INREV found the average management fee, based on NAV (the most widely used base for fee calculations), was 0.37 percent. Other bases for fee calculations included commitments to underlying funds, drawn commitments and invested equity.

Fee levels varied according to fund style and size, with the highest management fees attributed to closed-ended funds (0.86 percent), where calculations were based on invested equity.

Fund of funds with equity of between €500 million and €1 billion attracted lower fees on average (0.34 percent) than those with equity of less than €500 million (0.43 percent) indicating reductions on the basis of economies of scale

Around 60 percent of the funds surveyed reported paying performance fees – predominantly on higher risk funds. INREV said that investors seemed comfortable with the fees, so long as funds performed well. However, there was a growing emphasis on demonstrating that performance is based on realised returns as opposed to valuation-based capital gains, the association reported.

“What we’re seeing now is a real focus on reducing the fee burden for funds of funds. Management fees are a clear target but, with performance fees, I think we’ll see some interesting developments. More attention is given to performance fee structures, these should truly encourage outperformance and should be based on realised returns rather than rewarding standard fund management,” said Lonneke Löwik, INREV’s director of research and market information.