Terms and conditions are crucial but transparency is more important than magnitude of fees, survey shows
Lack of transparency is the biggest bone of contention for investors deciding on a private markets fund, according to a new report from Preqin.
While fees are widely perceived as a pain point for private market investors, the report revealed that they frequently withdraw from negotiations because of the fee structure, or object to how much the general partners will invest in their own funds. Fund terms, including transparency, are crucial for these investors.
The report draws its conclusions from a recent survey of over 300 private market investors, the majority of whom are asset managers, family offices, and insurance companies, reported Institutional Investor. One third (33%) of the respondents were from Europe, 24% from Asia, and 29% were from North America.
The report revealed 60% of investors have declined to take part in a fund because of the terms and conditions proposed for the fund, including how the interests of investors and private equity firms are aligned.
Read more: Private equity and venture capital are concerning risk-off LPs
One fifth (20%) of investors admitted to frequently withdrawing their money from a fund due to these worries.
The problem that causes the most concern is the absence of transparency: investors are more concerned with understanding what they are paying for than with the cost.
Three fifths (59%) of investors, up from 54% last year, think that the alignment of interests can be improved in this area.
In contrast, only 40% of investors are concerned about the level of management fees, and even fewer — just over 30% — are worried about the level of performance fees.
According to the Preqin report, management fees have been gradually decreasing for most asset classes. Buyout and growth equity funds' typical management fees are close to 1.9% of committed capital from investors, which is a little less than the customary 2%. Carried interest, however, has stayed the same at 20%.
Read more: When performance-fee structures end up costing investors
RJ Joshua, vice president of research insights and author of the report, that the fight between investors and partners over fees will persist in the near term.
“There’s going to be a balance of supply and demand,” he told Institutional Investor, noting that private assets may see increasing demand from investors as they can be better diversifiers than conventional fixed income portfolios, he said. "Demand for private capital is still going to be strong...especially when you look at the bigger picture and the multi-asset portfolios, where recently we've seen high correlation between bonds and equities."
Private debt, which has floating rates that rise in line with interest rates, is attractive to investors today.
Investors are also looking for more partners to commit capital to their own funds. Preqin’s report found a quarter of partners contributed at least 5% to their funds, and most have committed at least 1%.
“This helps to align the parties’ interests and mitigate the risk of a GP making more speculative, high-risk investments to maximize their performance-based compensation,” Preqin said.
