Allocators Are Still Waiting for Fee Breaks

Despite claims that allocators have more negotiating power, fees on private investments remain steady, data shows.


Illustration by II

As fundraising has slowed down across most asset classes, industry watchers expected investment managers to bend on deal terms, especially when it comes to fees.

Indeed, Preqin recently reported that average venture capital management fees have fallen 5 basis points year-over-year. Average management fees declined from 2.02 percent in 2022 to 1.97 percent in 2023, the lowest since 2017. Across all private asset classes, fees have, on average, stayed steady, Preqin reported.

Although data may show that asset owners are paying lower fees on private investments, that’s not happening broadly, allocators and industry experts say.

“I think LPs have experienced a reduction in headline management fees,” said Neal Prunier, senior director of industry affairs at the Institutional Limited Partners Association. “It’s misleading to say that it represents a major shift in negotiating power or outcomes. While that headline fee has come down, the total fee experience has gone up for LPs, and it has gone up exponentially.”

Three endowment allocators, who spoke to Institutional Investor on condition of anonymity, said they haven’t seen a similar decline. “GPs that have often been oversubscribed have certainly been more receptive to having discussions with new investors, as I believe they have less visibility into existing investor allocations,” one endowment investor said. “I haven’t come across anyone discounting fees, though, versus prior funds.”

This could, of course, be a difference in the type of fund or LP investing. “We’re investors in almost exclusively smaller, newer firms raising under $1 billion for funds I, II, or III,” another endowment investor said. “I don’t think we’ve seen fees come down, but these types of firms haven’t been the worst offenders in fees. Indeed, they have an argument that they need reasonable management fees to run their firms.”

Pension funds, which tend to deploy larger pools of capital, have seen a bit of the fee declines that Preqin reported. Using data from public pension funds, Preqin found that the actual fees LPs paid annually during the investment period to buyout funds was 1.36 percent. For venture capital, it was more like 1.96 percent.

Preqin theorized that this drop could be for a few reasons, including reductions in the rate charged on invested capital and a decline in the rate charged on total commitments.

A pension CIO, who spoke on the condition of anonymity, reports seeing more willingness to negotiate fees, particularly from emerging managers. Investors willing to commit in the first close or with a large commitment tend to be more successful, the CIO noted.

The CIO reported seeing discounts when the pension makes re-up commitments — but only if the commitment is more the second time around. For example, if the pension makes a 15 percent higher commitment than it did to a prior fund, the CIO has been able to secure fee discounts in some cases.

“I think there is a significant decline in private market commitment budgets, which means it is a much more challenging fundraising market for most GPs,” the pension CIO said. “This has also reflected itself in extended fundraising timelines.”

A second investor, who works at a defined benefit plan, has seen something similar. “Despite a slower fundraising environment, terms have only slightly moved in the LP’s favor; it’s not a complete reset,” he said via email.

More LPs could see these discounts sooner than later, thanks to the new private fund rule implemented by the Securities and Exchange Commission. The rule requires private equity firms to disclose the fees they’re charging to investors.

“Fees are always going to be an important component for LPs. There’s increasing pressure on external stakeholders that care about the amount of fees that are being charged. This is an important point for the industry to navigate and come to a more meaningful solution.”