Private debt is getting cheaper.
The rapidly growing asset class now reaching $600
billion in assets under management has not been immune
to the downward fee pressures faced by alternative managers,
according to a Preqin report
released Thursday. Management fees for 2016 vintage funds were
1.63 percent, tumbling from as high as 2.08 percent in 2013 and
an average 1.75 percent for the past eight years.
Fund terms and conditions within the alternative
assets industry have been of particular focus in recent years,
as investors have largely united to push managers for greater
transparency and improved alignment of interests, said
Ryan Flanders, head of private debt products at Preqin.
Fees across the private debt industry have largely been
decreasing as a result.
Private debt assets have quadrupled over the last decade,
increasing to $595 billion in June 2016 from $147 billion in
December 2006. The three largest private debt funds now being
raised are managed by Apollo Global Management, Centerbridge
Capital Partners, and Cerberus Capital Management, according to
Preqin, which predicts industry growth is likely to continue,
as 62 percent of investors it surveyed said they planned to
increase their allocations to the asset class over the long
Distressed debt has proven the most popular, with the
eighteen funds that closed in 2016 raising a combined $32
billion an average of $1.8 billion per fund, more than
twice the size of the average mezzanine debt fund. Currently,
Apollo European Principal Finance Fund III, Centerbridge
Special Credit Partners III-Flex and Cerberus Institutional
Partners VI are each seeking to raise $3.5 billion for
distressed opportunities, Preqin said.
Direct lending funds have the lowest management fees in the
private debt sector in recent years, charging a mean 1.44
percent from 2009 to 2016, according to Preqin. Distressed debt
managers charged 1.81 percent, the mean management fee for all
types of private debt funds raised in that period, while
venture debt funds were the most expensive at 2.17 percent.
In terms of performance, current private debt investors are
almost universally pleased with the asset class, with 95
percent reporting their private debt portfolios have met or
exceeded return expectations over the last year.
The majority of private debt investors do believe that
their interests are aligned with those of their fund managers,
and a quarter believe that terms have changed in their favor
over the past few years, Flanders said. Investors
are making ground in moves to equalize the trade-off between
fees and fund manager expertise.