Preqin Survey: PE Fund Fees Remain Problematic

(July 25, 2011) — Private equity fund fees fees remain problematic, a study by Preqin suggests.

“In the difficult fundraising market, negotiating favorable fund terms and conditions is of the upmost importance to investors. That such a large proportion of LPs will not consider investing in a fund that does not conform to the ILPA Principles is clear evidence of this,” said Preqin spokesperson Helen Kenyon.

Preqin’s survey found that 50% of limited partners feel that there is a misalignment of interests between themselves and fund managers when it comes to management fees.

Furthermore, 71% of investors are considering new general partner relationships in 2011, and just 29% will only invest with existing fund managers. Additionally, a significant number of investors believe that GPs should invest more in their own funds in order to achieve a greater alignment of interests.

“LPs are not necessarily demanding a specific management fee level; what is far more important is that the fees make sense in the context of the management of the fund,” Kenyon asserted in a release. “Our recent conversations with LPs have revealed that many will consider paying higher fees if this can be justified by higher performance, and if higher management fees are necessary to operate a superior firm effectively then many investors will see this as a price worth paying.”

A study last year by IE Consulting showed a majority of pensions believe misalignment of interests with their private equity managers (GPs) had become more apparent during the crisis. While two-thirds of the schemes surveyed thought the crisis had caused fund managers to act at odds with limited partners’ interests, three-quarters of the pension funds felt their private equity managers had tried to blame the financial crisis for their own investment mistakes.

Additionally, 61% of respondents said they will or have already declined to invest in a new private equity fund vehicle launched by certain managers with whom they had previously invested, as a direct result of poor communication or lack of transparency during the crisis.

Looking ahead, respondents to the survey said the fundraising environment would become increasingly tough, when private equity managers will face more difficulties raising a new fund in the next two years.