Strong LP appetite keeping fees high

An increase in LP appetite for private equity and infrastructure following the financial crisis has kept GP fees at a high level and investors at a pricing power disadvantage, new research shows.

A study by financial services firm bfinance reveals that fees in private equity and infrastructure have remained “intransigent” due to a limited number of institutional-quality deals.

“If we don’t like the fee, the next person in line will pay it,” said one US pension fund official cited in the report.

The sentiment was further echoed by Nick van Winsen, head of fiduciary management at SPF Beheer, a Dutch pension fund.

“In private equity and infrastructure the situation has not changed in favour of LPs. I would even say we’ve seen some deterioration in terms, such as lower hurdle rates or no hurdle rates,” he said in the report.

“There is too much money chasing a few good managers. Most PE and infra funds returned so much money in the past three years, as they’ve exited investments, that a lot of LPs are underweight allocations – a lot of us are looking at the same small group of managers.”

Anne Feuillen, a senior director in bfinance’s private markets division, said very popular private equity managers are removing hurdle rates “because they could”.

“This has a meaningful negative impact on net returns and reduces the alignment of interests between GP and LP,” she said. “It is very hard for investors in this fundraising climate to say: ‘no, that is a step too far.’”

However, certain GPs are showing signs of flexibility, reducing transaction and monitoring expenses which are included in their quoted fees. This is in recognition of such inclusions no longer being standard practice, the report said.

In addition, some managers are willing to delay fees on committed capital until the fund’s first investment has been made.

Fee trends have showed some compression in recent years in niches such as European private debt and private equity primary funds of funds.

“It is now quite unusual to find FoFs charging 110-125 basis points, as was relatively commonplace a decade ago, with more managers quoting in the 50-90bps range,” the report added.

This trend has been compounded by consolidation in the fund of funds market, with the report citing the Schroders-Adveq and Unigestion-Akina mergers.