Fee Check: Institutional investors sound off on the state of fees in the private markets

by Andrés Ramos, Content Marketing Specialist – Nasdaq Private Fund Solutions

Limited Partners offer their insights

Opinions and insights from institutional investors on the fees charged by private fund managers can be valuable feedback for GPs preparing to launch new funds as well as those seeking re-ups from existing investors.

In a panel discussion held during a recent eVestment-hosted event, Evolving Private Markets: Exploring the LP/GP Relationship of Tomorrow, we asked investors from three large pension plan operators for their thoughts on the state of fees in the private markets.

Below are some of the top takeaways from the panel.

Disconnect between fund size growth and fee setting

A point of concern for some LPs has been the absence of fee reductions as GPs raise larger and larger funds. Smaller and emerging fund managers use higher management fees to get fund operations off the ground and cover costs until investments mature and carry kicks in. Investors on our panel contend that as managers move up the chain to “mega” level fund sizes, the same rationale for high fees does not exist.

I think one of the sore points is that some of the mega-funds we’re seeing raised now are still being raised at sort of the “we were smaller” higher fee structures. And I think there needs to be a correction here… when I speak to other LPs, they’re often surprised with how big the management fee proportion is on the overall fees a fund generates versus the carry… So we all kind of see the 20% as a high number versus the 2%, but over the life of a 10 year fund this [2%] is really meaningful…

Investment Director, $80bn UK corporate pension plan

Better LP coordination needed to influence fees

While this concern on fees was shared by multiple panelists, they acknowledged that the sentiment is not universal across the investor landscape. Especially at the top-end of the market, with difficult to access managers, LPs as a whole are offering little resistance to high fees. In these cases, GPs retain the power as they are frequently over-subscribed and can simply accept commitments from the investors willing to pay the stated fee structures.

We have conversations around this all the time, we’re often the top one, two or three investors by size and we’re constantly trying to push the fees to a more reasonable level. But the demand for the GPs that have outperformed is just too great, and there are too many LPs that aren’t as concerned with the amount of fees that are flowing to the GP outside of the performance fee.

Sr. Portfolio Manager, €500billion European pension fund

Sale of GP ownership stakes and misalignment of interests concern LPs

An extension of investors’ concerns about high fees is the external sales of GP ownership stakes that have become more prevalent in recent years with fund managers. By selling a percentage of their businesses to third-parties, fund managers create a potential misalignment of interests between the ownership of a fund and the LP investors in that fund.

[It started with] mega-funds selling off a part of their GP [stakes] or going public obviously in some cases but now smaller mid-market funds are selling part of the GP [stakes] and that creates the diametrically posed alignment between the owner of the GP stake and then the LPs. It’s a tough battle but we’re fighting it every day.

Sr. Portfolio Manager, €500billion European pension fund

Whereas investors would prefer GPs focus on creating value in their existing portfolio, external parties are motivated by the steadier cashflows that come from the accumulation of assets and management fees. The focus of these groups is then ostensibly on raising larger funds and expanding fund offerings. While a fund manager may be merited in their decisions to raise larger funds and launch new strategies, it’s worth taking time to understand how these strategic decisions are viewed by existing limited partners.

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