Institutional investment consulting firm Callan’s annual study of fees and terms for 187 private equity partnerships uncovered a bump up in management fees from 1.75% to 2%.
Venture capital funds had the highest management fees with the maximum fee reaching up to 2.5%. Callan said the potential for high returns within venture funds helps to justify the higher fee.
“The most interesting analysis is the comparison by strategy type, given the large variation in fees from large buyouts to small buyouts to venture capital,” said Ashley DeLuce, vice president in Callan’s Private Equity group. “This analysis will be especially helpful when considering higher fee strategies, such as venture capital and small buyouts, by providing a more relevant industry comparison.”
Growth equity management fees tend to skew closer to buyout fees than venture capital fund fees. The average growth equity fee of 1.83% is comparable to medium buyout’s average of 1.87%.
Distressed/restructuring funds had the lowest management fees of any strategy type with a median of 1.50% and an average of 1.55%.
The incentive fees or carried interest percentage was mostly set pat at 20%, with 86% of funds reporting the figure. But some funds, mostly in the venture capital space, charged carried interests as high as 25% or 30%, particularly for funds in high demands.
Callan also started collecting data on tiered fee structures, or funds that charge a higher carried interest percentage once the fund reaches a certain threshold. Only 9% of the funds in their dataset had a tiered structure, but within venture capital more than 50% of funds had a tiered structure.
This year’s study was dominated by North American and global buyout funds, the dataset has become increasingly diverse. Callan said that the number of small buyout and venture capital funds increased, and correspondingly the number of large buyout funds surveyed decreased, which had a large impact on the results.
In conclusion, Callan added that despite the COVID-19 pandemic the partnership terms continue to be GP friendly. Some managers did offer management fee discounts in 2020, specifically for first closers to incentivize LPs to commit, according to the consulting firm, which has yet to see a shift toward more LP friendly terms.
Last year was the firm’s inaugural fee survey that surveyed 90 partnerships. The aim of the project is to help institutional investors evaluate private equity funds and serve as an industry benchmark when reviewing partnership terms.