Private debt funds' fees plunge to eight-year low as competition ramps up

By Daniel Lanyon on 10th March 2017

P2P/Marketplace LendingAlternative Credit

Fees are on a long-term downward trend, with direct lending funds charging the lowest average rate.

Private debt funds' fees plunge to eight-year low as competition ramps up

The average management fee charged by private debt funds has been on a downward trend over the past four years, reaching a eight-year low among 2016 vintage funds, according to data compiled by Preqin.

In the firm’s forthcoming 2017 Preqin Global Private Debt Report, research suggests the average management fee has stayed at constant level of around 1.75 per cent for the past eight years since the dark of the financial crisis. The exception being 2013 vintage funds, where the mean fee was 2.08 per cent.

This has now slumped to to 1.63 per cent for 2016 vintage funds, following the huge number of new fund launches into the direct lending space as well as increasing demand and supply in other areas of the Alternative Credit spectrum.

Of course, the complex array of portfolios, strategies and fund sizes is reflected in the numbers. Direct lending funds charge the lowest fees as vehicles without an equity component are less costly for the manager, whereas venture debt funds have higher fees due to the intensive resources needed to deploy early stage funding, Preqin says.

A third of investors surveyed by the firm say fees are the biggest concern facing the private debt industry in 2017, though a higher proportion stated valuations and deal flow were also key issues.

Ryan Flanders, head of private debt products at Preqin says there has been a particular focus in recent years on terms and conditions within the alternative assets industry with investors uniting to push managers for greater transparency and improved alignment of interests.

“Fees across the private debt industry have largely been decreasing as a result: however, individual strategies must assess the cost of management and the size of the vehicle in order to tailor their fund structures fairly.”

“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 favour over the past few year.” 

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