PE Investors Don’t Like Fees But Will Pay For Top Talent

Jul 26 2011 | 9:08am ET

Private equity investors are not happy with the fees charged by funds but are willing to pay for access to top managers, according to recent research from Preqin.

The research company polled 100 LPs and 50 institutional investors in two separate surveys to gauge investor opinion about the private equity space. Preqin reports that 50% of LPs are dissatisfied with p.e. fund fees but 61% are willing to pay more when the fund is guided by a manager with what they perceive to be a strong track record.

Other investor concerns include GP contributions, carry, hurdle rates and rebates.

Preqin says a significant number of investors believes that GPs should invest more in their own funds to achieve a greater alignment of interests.

A full 71% of investors polled said they were considering new GP relationships in 2011, with just 29% planning to invest only with their existing fund managers.

Preqin also found that mean management fees during the investment period for the largest funds have dropped to 1.71% in the past year. The mean rebate of transaction and other fees by buyout fund managers to LPs now stands at a record-high 83%.

A significant 69% of LPs said they would consider not investing in a fund if it did not conform to the principles laid out by the Institutional Limited Partners Associations.

“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. 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. 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,” said Preqin’s  Helen Kenyon.


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