Private Fund Managers Adapt to Fee Pressure in Competitive Market
Private fund managers are facing escalating pressure to recalibrate their fee structures as they compete for commitments from limited partners (LPs) within an increasingly competitive fundraising landscape. During the initial half of 2023, private fund managers have strategically offered significant fee reductions to secure rapid commitments during the crucial early fundraising phases.
Allan Majotra, the Founder and Managing Partner at 5Capital Fund Placements, underscores the growing bargaining power of LPs in fee negotiations. Some general partners (GPs) have gone to the extent of providing substantial discounts of up to 25% on both management fees and carried interest to attract investors committing more than 10% of the fund’s target capital before the initial closing.
Fee reductions, historically applied to entice early investors facing heightened blind-pool risk, have now become more widespread in response to the demanding fundraising landscape.
This fee-pressure phenomenon is not confined to the realm of private equity; it is also extending its reach into various other private market funds. Real estate fund managers, for instance, are adapting their fee structures to remain competitive by offering reduced or even zero management fees at specific fund stages, revising the profit-sharing model for fund managers, and elevating performance benchmarks.
The introduction of the SEC’s recent private capital fund disclosure rules is anticipated to reinforce fee transparency, providing LPs with greater insight and leveling the playing field for all investors. In this dynamic environment, private fund managers are compelled to strike a delicate balance between meeting LP expectations and ensuring fund sustainability.