What LPs consider a fair management fee

LPs expect a $5bn private equity fund to charge a 1.23% management fee, according to research from Asante Capital.

A survey of limited partners has highlighted the relationship between the size of a private equity fund and the management fees investors are prepared to pay.

LPs, on average, consider a 1.95 percent management fee to be fair on a fund of $250 million, falling to 1.78 percent for a vehicle twice the size, according to an annual survey from placement agent Asante Capital. The Asante report surveyed 188 limited partners representing $2 trillion in assets under management.

A $5 billion fund, on the other hand, would be expected to charge a 1.23 percent management fee.

“The management fee is supposed to be based on reasonable operating expenses and salaries. It should not be perceived as a financial incentive to raise a fund,” Edyta Brozyniak, partner at fund lawyer MJ Hudson, told Private Equity International in July.

“Beyond [a] certain point, any extra [capital] raised in commitments does not significantly increase the management expenditure – therefore the mega funds can afford and should offer lower fees.”

While there has been a reduction in the management fee rate at the larger end of the market, the adjustment has not been in line with how much fund sizes have increased, according to MJ Hudson’s Private Equity Fund Terms Research 2018 report in October. This means for some firms the management fee can be a “substantial profit centre”.