Spate of launches sees direct lending fund fees fall in 2017

By Daniel Lanyon on Wednesday 13 December 2017

Alternative Lending

The average management fee charged by private debt funds has fallen to a 10-year low among 2017 funds, particularly in the direct lending spac


Average private debt fund management fees have fallen to 1.50 per cent per year, according to research by Preqin.

Demand for private debt and alternative fixed income has boomed in recent years leading to a flurry of launches at both the fund and platform level. 

This increase in supply has meant mean and median fees are continuing a downward trend among 2017 funds, Preqin's research found. The median fee applied during the investment period is just 1.5 per cent, while the mean fee charged is marginally higher at 1.52 per cent.

The average management fee charged by private debt funds reached a peak among 2013 and 2014 vehicles, with a median fee of 2 per cent and a mean fee of 1.80 per cent. Since then, though, the median management fee has fallen to 1.75 per cent among 2015 and 2016 funds, and a record low of 1.5 per cent among 2017 vehicles.

At the same time, the mean management fee has fallen for four consecutive vintage years, reaching just 1.52 per cent among 2017 vintage funds, a 10-year low.

Direct lending funds account for a large portion of this downwards pressure as they compete to attract investors. Direct lending funds of vintage years 2008-2017 have a median fee of 1.50 per cent, the lowest of any fund type.

Preqin says this is driven in part by the proliferation of direct lending funds, which charge the lowest median fee of any debt type at just 1.5 per cent.

However, not all private debt fund types have average fees of less than 2.00 per cent, and in fact the average fees charged by venture debt funds sit significantly above that, with a mean of 2.3 per cent and a median of 2.50 per cent.

This may be, Preqin adds, in part because the investment process for venture debt deals is more labour-intensive, or because specialized and oversubscribed funds are better able to resist downward fee pressure.

Ryan Flanders, Head of Private Debt Products says as the private debt market has grown over the past decade, it has become increasingly distinct from the private equity industry, particularly in terms of fees.

“Direct lending funds primarily account for this downwards pressure: the debt type typically draws lower fee rates than other, more labour-intensive fund types, and the proliferation of direct lending funds coming to market has increased competition and driven fund managers to lower their fees.

Sign up for our newsletters

Your daily 7am download of all things alternative finance and fintech.

Fintech and alternative finance headlines with an exclusive Editor's Note each week. Delivered Monday at midday.