Study: Fee flexibility will draw LPs

Investors highlighted lower management fees as a key incentive to invest in funds, while GPs note investor hesitation about the asset class in general.

More than a third of investors and two-thirds of consultants identify fees as a major stumbling block to GP commitments, according to a study by SEI that surveyed 654 institutional investors, private equity managers and consultants.

LPs also identified lower management fees and lower incentive fees as the top two most appealing prospects in return for a larger commitment to funds.

“This is, no doubt, exacerbated by the fact that many continue to pay management fees for private equity funds loaded with assets that have little chance of being sold profitably. The issue is not paying fees per se, but the need to deliver value in return,” the report said.

Some GPs are responding to calls for lower fees. Over 40 percent of investors reported that they have seen lower management fees in the past few years, while 15 percent saw lower incentive fees. Moreover, 27 percent of GPs say they have already lowered fees, with 36 percent responding they are planning to do so in an effort to attract more investors.

Investors are also becoming increasingly aware of what their fees are being used for, Private Equity International reported earlier.

“We look more carefully at what fees are being charged to the fund versus paid by the GP, as some GPs have clearly tried to move more costs to the fund,” said a prominent LP from a US-based university endowment.

Moreover, GPs are being forced to provide more transparent reporting, with 60 percent of GPs having increased or considering increasing their reporting transparency with a view to attract new LPs or get larger mandates from existing LPs, SEI’s survey showed.

However, the report shows that not all GPs believe they are obligated to provide the desired information.

Information on leverage is the most critical data LPs seek when it comes to assessing and understanding risk, yet only six out of 10 GPs said that they will provide information on leverage, according to the report.