Covid-19 Could Force Private Capital Managers to Lower Their Fees

Limited partners had more control over fund terms during the last crisis, according to Preqin.

Illustration by II

Illustration by II

Asset allocators are likely to have the upper hand over managers in any near-term commitments to private capital funds, if recent history is any indication.

Preqin data from 2009 indicates that limited partners were better able to negotiate lower fees and other favorable terms in the wake of the 2008 financial crisis. In the 2009 survey of private equity investors, 43 percent said the balance of power had shifted toward LPs, while just 2 percent believed that general partners had gained power. Thirty-six percent said their position had not changed, while the rest reported that they weren’t investing in private equity at the moment.

“The few LPs with fresh capital to commit found themselves in a stronger position to negotiate fund terms and conditions in their favor,” Preqin analyst Ashish Chauhan wrote in a new blog post discussing the 2009 data. “Some fund managers were able to compete for this investor capital by offering more LP-friendly terms and conditions.”

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In 2009, Preqin said average management fees charged by new buyout funds dropped from the standard 2 percent to just over 1.8 percent. The most substantial discounts occurred at the biggest funds, with vehicles at the $1 billion mark or larger cutting management fees by 25 basis points compared with 2008 vintages, according to Preqin.

Management fees have since climbed back up: Preqin reported that the average fee for buyout funds launched in 2019 was 1.99 percent.


“In recent years, fund managers have had the upper hand in setting fund terms favorable to GPs over LPs,” Chauhan wrote. “Yield-hungry investors poured large sums into private capital funds, helping to drive total assets under management to $6.96 trillion as of September 2019. This search for yield tipped the balance of power toward fund managers.”

With the coronavirus pandemic expected to slow fundraising, the Preqin analyst suggested that the balance of power could shift back toward investors.

“Given current market conditions, fund managers may again look to attract investors by offering more LP-friendly terms and conditions,” Chauhan wrote. “This includes lowering management fees.”